Bad news: What you say doesn't matter

All it took was “loud” allegations from a whistle-blower to knock 16 per cent off the Infosys market value in a single session just about a month ago. To date, the company says there is still no evidence of alleged wrongdoing by the CEO or others.

Regardless, the damage to the company’s reputation is done. The  Rs 53,000-crore hit in its market cap and the reputation of the firm and its leaders will take Infosys some years and a lot of outperformance to claw back. 

Reputation has become the biggest driver of market and brand value today for investors and customers. For PE funds or mutual funds — reputation is increasingly the touchstone for investment decisions and a leading indicator of true market value. 

A 2018 study by Reputation Institute, a global firm, estimated that corporate reputation is now directly responsible for an average of 38 per cent of market capitalisation across the FTSE 100 and FTSE 250; of that the CEO’s brand accounted for about 40 per cent of the company’s brand. Given the recent falls in some respectable names, one suspects that for the Sensex 30 or Nifty 50, the reputation weightage would be a few notches higher. 

While consultants are busy selling fancy environmental, social and governance (ESG) frameworks as the new mantra for “responsible corporations”, the reality is that in today’s age of media polarisation, reputational damage often trumps a corporate’s ESG score.

As ever, equity markets continue to pick up these cues on reputation damage far quicker than lenders. The futures and cash prices of stocks crash long before the credit ratings start disappearing into the basement, the auditors quit, lenders begin to panic or before PILs are filed or investigators come calling at midnight. And once in the reputation glare, it is difficult for most firms and leaders to extinguish the flames before someone gets badly burnt. 

Note the household names —Zee, Yes Bank, DHFL, Jet Airways — whose shares now litter the floors of the bourses, where once they were held in high esteem and rewarded with frenzied valuations. While the underlying causes may be economic and even circumstantial — excessive promoter leverage, ill-conceived expansions or just too much real estate exposure in a country with 0.7 million empty apartments — the reputational injuries suffered may be fatal, as far as customer trust and market valuations are concerned.  

So where did blue-chip Infosys err? In her column, “Infosys Forgot Founder’s Mantra: When In Doubt, Disclose”, senior journalist Menaka Doshi says that the key point is not the allegations per se but the manner in which the company chose not to react or disclose immediately. It was only when two media reports forced their hand, followed by a sharp stock price fall that it merited more detailed explanations from its chairman.   

Immediate response and disclosures as well as a rapid and calibrated resolution path are the only defence left for firms today. The other time-tested tactics, like timing the release of bad news after a specific corporate event (like quarterly results in Infosys’ case) or more generically late on a Friday evening (“putting out the trash” as PR folks call it) and expecting it to be forgotten by the Monday news cycle, don’t work. Equally difficult is “stopping a story”, when news outlets have multiplied and the need for good content has become insatiable — ergo if one or two don’t publish, the fourth or fifth outlet will. 

The 2019 Crisp Crisis Impact report also underscores this argument.  In today’s online frenzy, the importance of a timely response is key to avoiding reputation damage. Over 50 per cent of those surveyed said that they expected brands to respond to a crisis within 60 minutes. A similar number wanted to directly hear from the CEO and not through an impersonal press note in such situations. 

Moreover, there are strong upsides for brands in responding immediately that many firms and their leaders don’t seem to appreciate. Ninety per cent of customers in the Crisp report felt that they would continue to favour a brand that reacted promptly to a reputation issue. Investors are less likely to dump your stock once they are convinced about the authenticity and immediacy of the response.  

For firms, these issues are only going to intensify. Online and social linkages between value and reputation will continue to strengthen as the next billion come online. The impact of user-generated content which takes the brand out of the brand owner’s control is only growing. Once on social media, the brand is every Twitter, Insta and Tik-Tok user’s to toy with. They can post about your brand, meme it, mock it and share it. How well and how quickly a firm responds will determine  its value. 

The writer is a communications professional