This piece originally appeared on PR News and is reposted here with permission.
In PR, we often speak of proving the value of PR and generating a positive PR return-on-investment (ROI) as if the two are interchangeable. We need to differentiate them. The board of directors certainly knows the difference. By misusing these terms, we undermine PR’s professional standing.
Proving value is a subjective measure: values change from organization to organization, and even from one person to another within the same organization. That’s what makes proving value difficult.
Generating a positive PR ROI requires a quantitative assessment relating to attributable revenue, as well as revenue retention and cost avoidance.
In the previous two issues of PRNEWS, we focused on efficiency as the most accessible path to ROI and revenue generation as the most alluring ROI route. This month, we highlight avoiding catastrophic cost.
The Cost of Reputation
As we’ve said previously, everyone within an organization shares a responsibility to uphold its reputation. In addition to the communication team, accounting, sales and manufacturing have roles in building and maintaining reputation.
The benefits of a good reputation are well known: such companies command higher prices in the marketplace, they pay less to vendors and attract and retain the best talent.
Investors see long-term upside in reputable companies and community leaders, from the local mayor to federal regulators, tend to give them the benefit of the doubt.
However, just as the rewards for positive awareness are great, the punishment for an adverse reputation event has never been more severe.
Cost Avoidance, Market Capitalization
What makes cost avoidance the most impactful path to ROI? Two words: market capitalization. Or in this case, the loss of market capitalization and diminished shareholder value.
Consider the following examples:
- A global automotive manufacturer lost $17.6 billion in market value in just four days owing to a scandal
- An iconic airline lost $1 billion in market cap in 24 hours after a viral video showed a passenger’s mistreatment
- A prominent social media platform lost roughly $60 billion in market value in just two days following an advertising boycott sparked in response to the company’s position on hate speech and disinformation
Each company rebounded, in part, due to quality PR. However, other firms with reputation issues totally disappeared.
Saving Face and $$$
Here’s a story of an energy company that confronted an episode with catastrophic cost potential. Beyond simple survival, though, the company went on to thrive, thanks to data-informed advice from communicators.
Here’s what happened. Just a few days after the CEO promised that it would never reduce dividends, an unexpected shortfall arose. The generous dividend was in doubt.
The CEO gathered legal and PR leadership.
Legal’s advice was to state facts and say nothing more.
Communication leaders urged telling stakeholders what happened, why and how the company planned to fix it.
Communicators proposed a research project to help test the viability of the two approaches. The project paralleled media trends and stock price for the year prior to, and the year following, an adverse event.
The analysis looked at six peer companies that found themselves in similar situations. Three followed the lawyers’ path, three took the communicators’ advice. It revealed:
- In the week following their adverse event announcements, all six companies suffered stock price drops of roughly 8% on average.
- The companies that provided context and guidance achieved an average 12% gain by year’s end.
- Firms that followed the lawyers’ rationale suffered declines in stock price; one went out of business.
While the urgent turnaround prohibited a causal analysis, a time series analysis tracking news about the companies and their stock prices showed a strong concurrent pattern.
Legal or PR?
Based on this research, the CEO felt sufficiently confident to take the communication team’s advice. He announced the dividend reduction at the quarterly shareholder meeting and provided context around what occurred, why and what the company already was doing to resolve the issue.
As forecasted, its stock took a hit for about one week, but soon reversed course and rebounded for a net gain of 15% in the 12 months after the announcement.
In taking the counsel of communicators, the CEO mitigated the impact of the dividend reduction and avoided the potential for more severe market capitalization consequences.
In this case, media analysis served an important purpose. Most of what shareholders knew about the company was based on indirect experiences as derived from secondary sources like financial analyst reviews, news and social.
Here, the media reflected stakeholder opinion while simultaneously shaping it.
Given the time constraints, media analysis served its purpose by sufficiently validating the chosen path. What’s more, this example quantified the importance of quality PR counsel and the impact of a crisis averted.
We tend to lean toward PR’s contribution to sales as the most important measure of its contribution to ROI. Yet the amount of revenue PR-driven sales generates usually is a small fraction when compared to avoiding billions of dollars represented in market cap losses stemming from scandalous reputation-damaging events.
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