Business Continuity and Shareholder Value. What is Shareholder Value? Pop Quiz. Steven Ross Deloitte & Touche New York

Transcription

1 Business Continuity and Shareholder Value Steven Ross Deloitte & Touche New York What is Shareholder Value? The term is widely and variously used Corporate value minus debts (Net present value of all future free cash flows plus value of non-operating assets) minus future claims (i.e., debts) The long-term value of a company s holdings What you can sell the stock for Source: ValueBasedManagement.net Pop Quiz What is the effect of crises and catastrophes on shareholder value? Value goes up Value stays the same Value goes down 1

2 Pop Quiz What is the effect of crises and catastrophes on shareholder value? Value goes up Value stays the same Value goes down Answer: It depends Catastrophes and Share Prices Stock Values in a Crisis In virtually every case, stock value falls in the immediate aftermath of a catastrophe and remains in a negative state for up to 50 trading days And then 2

3 Long-Term Negative Effect Operating Income Return on Sales Return on Assets Sales Growth Cost Inventories 107% Decline 114% Decline 93% Decline 7% Decline 14% Increase 11% Increase Year 1 Year 2 Year 3 Year 1 Benchmark Profitability Occurrence Public Report D Time Note: Deloitte & Touche Representation of Source Source: Vinod R. Singhal, The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price, Georgia Institute of Technology, June Recoverers and Non-Recoverers Recoverers 10 % Value Change D Non-Recoverers Post-Event Trading Days Note: Deloitte & Touche Representation of Source Source: Rory Knight & Deborah Pretty, Protecting Value in the Face of Mass Fatality Events, Oxford Metrica, 2005 Who Are Some of the Recoverers Johnson & Johnson Tylenol tampering Stock price history As on 12/31 year end prior to incident $37.12 Disaster Day September 30, 1982 $ days later October 05, 1982 $39.00 A year later September 30, 1983 $ Today, after four 2:1 splits $

4 Who Are Some of the Recoverers Exxon Exxon Valdez oil spill Stock price history As on 12/31 year end prior to incident $44.00 Disaster Day March 24, 1989 $ days later March 30, 1989 $43.88 A year later March 24, 1990 $46.13 Today, after two 2:1 splits $65.27 Who Are Some of the Recoverers Shell Oil Explosion and fire, 1988 Heineken Faulty bottles, 1993 AIG Saigon fire, 22 killed, 2002 Norwegian Cruise Lines Fire on ship, 8 killed 2003 Who Are Some of the Non- Recoverers? Union Carbide Bhopal gas leak No longer independent (Dow) Pan Am Lockerbie crash Out of business 4

5 Who Are Some of the Non- Recoverers? Source Perrier Benzene contamination Bought by Nestlé ValuJet Plane crash No longer independent Source: Rory Knight & Deborah Pretty, The Impact of Catastrophes on Shareholder Value, Oxford, 1996 Protecting Value in the Face of Mass Fatality Events, Oxford Metrica, 2005 Who Are Some of the Non- Recoverers? TWA Explosion on Flight 800 Out of business Similar Incidents, Different Results Consumer Product A Defective glass bottles Millions of items recalled Up to $50 million in losses Management was open about the problem and executed a rapid recall Consumer Product B Toxic chemical introduced into the product 160 million items recalled $262.9 million in losses Management attempted at first to cover up the incident, delayed a recall and never recalled all items in every country 5

6 40 Similar Incidents, Different Results Consumer Product A Consumer Product B % Value Change % Value Change Post-Event Trading Days Post-Event Trading Days Source: Rory Knight & Deborah Pretty, The impact of Catastrophes on Shareholder Value, 1996 Note: Deloitte & Touche Representation of Source Focusing the Business Continuity Management Program Interpreting the Data Business Continuity Management, as often practiced, is only a palliative if a crisis is not managed effectively Business Continuity Management can keep a company going but, by itself, cannot keep it in business Some industries are more vulnerable to disasters Airlines Chemicals 6

7 Why Do Some Recover and Not Others It depends Depends on What? Financial differentiators The actual economic loss of the catastrophe The impact of a crisis on cash flows The impact of losses on capitalization Depends on What? The number of fatalities Management s ability to deal with the aftermath Senior Management leadership Ability to communicate with families, shareholders, the public and other stakeholders Taking rapid and effective action to contain the crisis Engagement of specialist services to assist in the response 7

8 What Does This Mean for the BCM Program? The impact of a crisis on cash flows In many instances, the short-term impact of a catastrophe on cash flows is sharply felt This is one of the factors that makes airlines so vulnerable Thus, a significant focus of Business Continuity actions should be protection of cash flow Keeping sales outlets open Preserving distribution flows Recovery of transactional systems Communicating the underlying safety of the company What Does This Mean for the BCM Program? The impact of losses on capitalization Recent events have shown that in certain industries (e.g., financial services) shareholder value can be directly impacted by crises Undercapitalized companies become takeover targets Therefore, the financial limits to use as a benchmark in a BIA might be the company s capitalization What Does This Mean for the BCM Program? But what about insurance? Effective management of the consequences of catastrophes would appear to be a more significant factor than whether catastrophe insurance hedges the economic impact of the catastrophe Knight and Pretty, 1996 The existence of insurance can soften the economic blow over time but does not seem to have much impact on share price 8

9 What Does This Mean for the BCM Program? The number of fatalities Fatal events draw more attention to a company than incidents in which the only effect is disruption of operations Mass fatalities act as a multiplier effect on the market s perception of future cash flows Therefore life, health and safety protection need to be major components of BCM programs Hazardous industries are well aware of this What Does This Mean for the BCM Program? Management s ability to deal with the aftermath Bad things happen good companies show their mettle at those times A company s Crisis Management program is more critical to shareholder value than its Business Continuity Management program It is the opportunity for management to demonstrate underlying flexibility, responsiveness and adaptability What Does This Mean for the BCM Program? Ability to communicate with families, shareholders, the public and other stakeholders Even more important when there are fatalities involved The marketplace makes decisions in part on the perceived sensitivity of leadership Crisis communications may have more to do with shaping shareholders perceptions of a company s value than any other aspect of recovery 9

10 What Does This Mean for the BCM Program? Taking rapid and effective action to contain the crisis Management must not only act resolutely but be seen to be doing so Training and awareness are not only for business unit employees Executive management needs preparation and exercising to respond to crises What Does This Mean for the BCM Program? Engagement of specialist services to assist in the response, e.g. Crisis counseling, family assistance, identification of remains, memorials, humanitarian services Not a delegation of responsibility but recognition that management cannot do everything itself, especially in times of stress Appears to have direct effect on share price in the medium to long term The Meaning for Executive Management 10

11 Typical Business Continuity Management Testing Structure Business Continuity Management Typical Business Continuity Management Testing Structure Business Continuity Management Sometimes tests Disaster Recovery Plans Typical Business Continuity Management Testing Structure Business Continuity Management And sometimes BCM tests plans with the business 11

12 Typical Business Continuity Management Testing Structure Business Continuity Management And sometimes staff functions are involved Typical Business Continuity Management Testing Structure Business Continuity Management And even occasionally there s an integrated test Typical Business Continuity Management Testing Structure Business Continuity Management But how often does Executive Management train for and test its ability to manage the company through a crisis? 12

13 and Crises In a sense, deals with crises every day Bur there is something different about crises that affect shareholder value Fatalities Capital and cash flow impact The glare of media and public scrutiny and Crises The structure of command and control in normal times and Crises Breaks down when an organization is confronted by a catastrophe. 13

14 and Crises Resolution of the catastrophe falls of necessity to those closest to the problem and Crises And Executive Management s role becomes focused on internal and external communications. Source: Duncan Watts, Six Degrees: The Science of a Connected Age Note: Deloitte & Touche Representation of Source The Management Traits of Recoverers Research shows that the necessary traits of Recoverers include Nimbleness Flexibility Sensitivity Honesty Transparency Communication 14

15 The Management Traits of Recoverers In other words, the traits that are necessary to maintain shareholder value in a crisis are the same as those necessary to run a wellmanaged company Resilient companies offer greater value to the marketplace in general and to their shareholders in particular; they are better companies The Management Traits of Recoverers The markets respond positively to firms which demonstrate essential human qualities; sensitivity, compassion, honesty and courage. Knight and Pretty, 2005 Will your sensitive, compassionate, honest and courageous in a crisis? How do you know if they haven t been put to the test? Further Information Rory Knight & Deborah Pretty, The Impact of Catastrophes on Shareholder Value, Oxford Executive Research Briefings, 1996 Rory Knight & Deborah Pretty, Protecting Value in the Face of Mass Fatality Events, Oxford Metrica, 2005 Vinod R. Singhal, The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price, Georgia Institute of Technology, June Duncan Watts, Six Degrees: The Science of a Connected Age, Norton, 2002 And stross@deloitte.com 15

16 About Deloitte Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's 150,000 professionals are committed to becoming the standard of excellence. Deloitte's professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloitte's professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. 16