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August 4, 2015

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Merlin’s Profits: A Vanishing Act

Smiler rollercoaster at Alton Towers, picture courtesy of @WMAS (West Midlands Ambulance Service)

Smiler rollercoaster at Alton Towers, picture courtesy of @WMAS (West Midlands Ambulance Service)

By Anne Davies and Chris Adams, Withers LLP

Merlin Entertainments (‘Merlin’) has recently predicted a £47m fall in profits for its theme parks division in 2015. Largely a result of the Alton Towers rollercoaster accident on 2 June, the drop amounts to almost half the previous year’s profits. The announcement caused Merlin’s shares to fall by more than 4 per cent, as the company admitted that the disruption to its business could continue into 2016.

According to Merlin, the share price fall was down to a substantial reduction in visitor numbers. Temporary closures and suspended advertising affected the peak summer period and customers have been slower than expected to return, compounded by the weakening euro deterring foreign visitors to the UK.

Reputational Damage

Merlin’s customers were undoubtedly shaken by reports of the serious injuries suffered by the 16 accident victims, with two of them needing leg amputations. The company was also criticised for its accident response procedures: emergency services were not contacted until 11 minutes after the crash, and paramedics were initially unable to reach the injured because fire crews had not been called. Although Merlin acted swiftly to accept responsibility and expedite compensation payments to victims, the profit warning comes as a stark reminder of the devastating effect which a serious incident can have on a company’s balance sheets.

Risk Planning

Corporate risk registers commonly anticipate potential business threats such as catastrophes, data security breaches, effects of restructuring or IT system failures. Some may have direct financial repercussions, or exert a more subtle influence on share prices by damaging the corporate public image. They can be entirely self-inflicted: Ratners jewellery chain discovered the cost of alienating customers when reports of its Chairman describing a product as ‘total crap’ in 1991 led to profits of £112.1 million turning into a loss of £122.3 million within a year. Other risks are outside an organisation’s control: the mining company Glencore recently blamed a 42 per cent drop in its share price since 2011 on overproduction of raw materials by its rivals.

All too often, however, safety concerns are not given enough significance in management decisions. Even if health and safety appears on most Board meeting agendas, it rarely gets as much attention as finance and strategy. Many companies count the financial cost of health and safety incidents solely in terms of legal costs, fines or work-related sick pay. These direct costs can be significant – Transco were handed a record £15m fine after the 1999 Lanarkshire gas explosion – but are usually just the tip of the iceberg. Indirect costs can be enormous: low staff morale, reduction in share prices and damage to brand, the last of which can spiral out of control in the face of campaigns and comments on social media.

Safety needs to be an integrated part of an organisation’s overall risk management strategy, with each risk identified and graded by likelihood of occurrence and significance of potential impact. This makes commercial sense, increasing efficiency by targeting resources at each organisation’s most significant risks, rather than applying funds to all risks indiscriminately. This approach promotes business sustainability, moving away from short-term financial goals to an ambitious long-term strategy with greater vision.

Organisations with safety as a genuine priority develop a strong culture based on actions rather than words. It is that culture which preserves shareholder and customer confidence and ultimately protects the balance sheet.

Anne Davies WhiteBGAnne is a Corporate and Financial crime specialist. She has handled a broad range of regulatory investigations over the last 20 years, assisting both companies and individuals minimise the risk facing them through criminal and civil liabilities arising from internal or external investigations. She has developed a particular specialism in providing strategic health and safety advice, covering health, product and fire safety. She has the knowledge and resources to work on domestic and international corporate crime litigation matters including bribery and corruption, insider dealing and money laundering.

CBAChristopher is a paralegal in Withers LLP litigation team. He has broad experience of working with corporate and individual clients assisting with litigation, particularly that involving corporate and financial crime under fraud and health and safety legislation.

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