For Long-Term Preservation of Reputation, How Do You Handle Bad News?

As we watch SONY try to resurrect its online gaming network from a severe and (now) clearly widespread hacking, it reminds us of the terrifying news that slowly leaked out in the damaged Japanese nuclear reactor s stories (much as radioactive water simultaneously was leaking out into the ocean). BP seemed to want to spoon feed us the bad news, as did Toyota with its sudden acceleration problems. 

Valuation analysts many times rely on the public sector for guideline public company transaction data and other analytical tools; we thought maybe the public sector would have guidance on how bad news ought to be handled.

Just as we expected, there is a lot of material available on this, and the best source is academic research catalogued under “investor relations.”  Though their focus tends to be mitigating or avoiding shareholder suits, their conclusions point the way toward long-term preservation of reputation.

The research tends to agree:  1) if there is good news and bad news, serve up the bad news first; 2) the sooner the bad news is announced, the better.  Research also found that though the medium used for announcements matters, the timeliness matters more.  Stringing out the bad news moves the effective date of the overall announcement to the date last tidbit is added.