Lessons in Crisis Communications: Cauterize the Wound
Last week, State Street Corporation ousted its investment unit chief and set aside $618 million to cover future legal claims against the company, according to Bloomberg.com. And then something very interesting occurred– the company’s stock went up.
Why?
There are few things that Wall Street hates more than the question mark. By defining a beginning, middle, and end to the story, State Street made the story ‘old news’–and for this kind of definitive action, they were rewarded. The lesson here is that whether you’re talking about toy recall or an SEC investigation, moving expeditiously (when it is within your power to do so) almost always pays off.
State Street is a textbook case study in the right way to handle crisis communications:
- They talked about it: Instead of trying to sweep the issue under the rug or issuing a terse ‘no comment,’ State Street talked about the issue, speaking openly to the media.
- They took action and made a sacrifice: The company set aside money to cover future claims–money that comes right off of the company’s bottom line. They showed that they were willing to do the right thing, not just the easiest thing, to rectify the situation.
- They put a face on it: Every story that includes conflict needs a villain. State Street replaced those individuals who were ultimately responsible for the subprime mortgage miscalculations, thus ensuring their particular misjudgments would not reoccur.
- They sent a strong message: All of their actions sent a message to employees, media, analysts, and shareholders–we admit that we had a problem, and now we’ve solved it.
State Street’s swift and definitive action allowed them to successfully stem the potential tide of bad media and even worse shareholder reactions. Other companies in similar situations would be wise to use the State Street situation as a crisis template.
January 8th, 2008 at 7:23 pm
Otto Lerbinger in “The Crisis Manager: Facing Risk and Responsibility” classifies this type of crisis as a management failure, specifically, one of skewed values whereby “powerful market and financial pressures [tempt] managers to engage in questionable behaviour” (p. 13).
Would you agree with this kind of classification?
In your opinion, would you advocate State Street’s crisis template exclusively for this sort of situation, or is it applicable to other types of crises?
Thanks,
Michael
January 9th, 2008 at 7:13 pm
It is unclear whether the “inappropriate bets” made by State Street on subprime mortgage instruments were qualitatively different from what other institutions did.
The fact is that the stock went up even with this action. The Bloomberg article’s analysis seems right: Operating profits were up, even with about half a billion dollars set aside to defray the company’s legal exposure. So the stock was essentially inoculated against future uncertainties. Any financial institution that has failed to plan for a subprime fallout has a stock that is still freighted with risk. The market doesn’t reward that.
I think classifying the underlying problem as a “management failure” is a bit too easy, though, since many sober financial institutions were directly or indirectly involved with subprime mortgages. Why not get involved? The risks on those mortgages appeared to be going “out to markets” (that is, moved outside the firm).
This is a classic case where modern portfolio management, based spreading and selling risk in various instruments, led managers to feel that things within their four walls were probably OK, and if they weren’t OK, then at least everyone in the sector was participating equally in the risk-reward formula. Hey, at least we’re not selling less than our competitors! they were saying. One thing managers have to do is to make as much money as they can, within the performance characteristics of their sector. So, was it a management failure or a market failure?
Probably both. Just because everyone is doing something stupid doesn’t mean you should do it, too. But, without a doubt, it is a management victory to stop the bleeding while maintaining operating profit, which State Street did. Hence their good stock performance.