When companies find themselves in the public eye for the wrong reasons, they can choose to respond with any number of crisis-minimizing strategies.
They can apologize, for example, or release a legalese statement. They can play down the severity of the issue or share a backstory as an explanation. Or, to use the language of HBO’s Succession, they can make a blood sacrifice and send a top executive packing.
Are any one of these options best able to shield a company’s stock price from a sell-off? Not at all. What’s most important in these moments is coherence, says Matt Hersel, assistant professor at Clemson University and lead author of a new study that looks at how the market responds to a company’s handling of misconduct.
The paper zeroes in on companies caught in accounting scandals that subsequently fired executives connected to the misdeeds. Rather than investigate crisis communication or executive dismissals alone, Hersel explains, he and his coauthors wanted to see how shareholders interpret a board’s words and actions. They looked at historical data from S&P 1500 companies in one study and ran an experiment using hypothetical scenarios in a second. In both cases, the research showed consistency through a storm was key to reducing share price volatility, while mixed signals scared off investors.
For instance, if a company pins an accounting problem on a digital transition, but the board fires the CFO weeks later, that sets off alarm bells for shareholders, says Hersel. “That's where we see pretty strong negative stock market reactions to the dismissal.”
While such takeaways may seem self-evident, the research reveals how often companies do not get it right. People want companies to walk the talk, says Ashley Gangloff, assistant professor of management at Elon University and a study coauthor. “It seems ridiculous that any one leader, any group of leaders, any organization would do anything different, but what we found in the actual data is that firms are all over the place.”
To avoid a mismatch between public statements and corporate actions, boards need to become engaged with a crisis early and take some control over how the company reacts, says Hersel. The question shouldn’t be, “How quickly can we respond?” but, “How will our next move be received in relation to our previous statements or planned actions?”
Boards ought to be engaged enough to preempt problems, which is part of the lesson here. When a company finds itself in a flap over anything—a financial transgression or a right-wing backlash to a savvy, laudable marketing campaign (see Budweiser)—what’s often behind a company’s confused response and executive departures is weak management that went unnoticed.
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
