Bad New First

In my experience as a person working in the investment sector for two decades, the golden rule of IR communication is to communicate potential worst-case scenarios clearly when the expected downside is not small. Here, I use the word “expectation” in its economic sense, so the expected downside equals the probability of occurrence multiplied by the loss in that case. This means that if the loss could be serious even with a relatively small probability (say, 10-20%), we should communicate it.

I understand there’s a debate about this. One party argues that such communication could trigger unnecessary concern or panic if the event doesn’t materialize. In some cases, that kind of panic can kill an organization, especially if the company is publicly listed or has many creditors (bank runs happen in this mechanism). The other party, to which I belong, contends that withholding information will be costly in the long run. If stakeholders realize we deliberately withheld information while understanding the risk, we may lose their trust. Trust here means that we convey even bad news and worst-case future scenarios beforehand, so stakeholders can be confident that nothing is hidden.

Trust is not about making no mistakes. Humans are not perfect, so are organizations consisting of imperfect human beings. Trust is about sincerely disclosing mistakes we’ve made, explaining why they happened and how we’re fixing them—in other words, fulfilling our accountability. As we’ve learned from many scandals, e.g., Enron, hiding problems is often worse than the problems themselves.

The cost of not communicating bad news will be far greater when it does occur. This can be better understood through the lens of information asymmetry.

There is significant information asymmetry between a company’s management and its stakeholders. Without trust, stakeholders must independently verify all information, which entails costly information-search activities. This cost gets embedded in their required risk premium, ultimately lowering the share price.

An additional challenge with trust is that once people lose it, recovering it is extremely difficult. Anything that can be lost permanently becomes even more valuable, given that the option value is gone.

Gojo has five values, and one of them is trust, which is defined as “We build trust and demonstrate our loyalty by telling the truth without concern for appearances.”

We’ve established credibility by communicating transparently, even about challenging developments, which has enabled our stakeholders to continue supporting us through difficult periods. I have also tried to do the same—I’ve made many mistakes, but at least I haven’t hidden them. I hope we/I continue to uphold this value.