For strife-prone companies, there's no escaping the long-term fallout. Pic via Getty Images
Criterion: Counting the cost of corporate misadventure goes beyond the financials
Experts
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- A new report quantifies the heavy cost of corporate cock-ups and scandals
- On a global measure, share prices tumble an average 35% and take more than a year to recover
- Non-financial impacts include forgone opportunities and ongoing reputational damage
Corporate crises come in many guises – not just financial – but the resounding message from a global study released this week is that they all can inflict long term damage on both earnings and share valuations.
In many cases, the damage endures long after the lurid headlines have faded.
A local ‘change and engagement’ consultancy, Senate SHJ analysed the fallout from 313 public companies globally afflicted by crises over the last 40 years.
These issues range from embezzlement, cyber breaches, consumer recalls, environmental disasters and management (including founder) misbehaviour.
“The road to recovery is long, with companies averaging 425 days to regain pre-crisis stock levels,” says report author Craig Badings.
What’s more, one-third of the afflicted companies share prices are yet to recover – and some have gone broke.
Counting the damage
The firm’s Crisis Index 300 shows that, on average, corporate crises result in a 68.6% drop in earnings per share (EPS).
At their nadir, share prices tumbled an average 35%.
(These numbers take account of any overall movement in the relevant index or sector).
By type of crisis, mismanagement, white-collar crime, and environmental damage resulted in the steepest share price losses.
Sectorally, the most affected were telco, energy and banking.
The worst hit ASX stocks included Crown Resorts after its 2019 money laundering controversies, resulting in the company being acquired and delisted.
The 200-year-old Westpac (ASX:WBC) remains a rock-solid banking pillar. But Westpac took the longest of any Crisis Co stock to recover, after a 2018 money laundering scandal.
Westpac shares fell as much as 48% and took 623 days to recover and EPS took 2170 days – almost six years – to get back to where they were.
Lasting impacts
Years on, BHP (ASX:BHP) remains haunted by the 2015 collapse of Brazil’s Mariana tailings dam which it jointly owned, killing 19 people and leaving thousands homeless.
BHP is being sued by more than 600,000 Brazilians in a £36 billion class action being played out in a British court.
The executives cited reputational damage, mental health issues and “erosion of trust and confidence” in management.
There’s also the unquantified opportunity cost, with management time diverted from business development.
After Rio Tinto (ASX:RIO) infamously (but legally) blew up a cave at WA’s Juukan Gorge containing ancient Aboriginal artwork, the financial impact was muted.
However, both the chairman and CEO were forced to resign.
“There may not be a massive financial impact from a crisis but – boy oh boy – they do have ramifications.” Badings says.
Crises can spur positive change
Sometimes, positives can result from the darkest of corporate episodes.
The Rio Tinto’s blunder resulted in stronger heritage protection laws.
After the tainting of Johnson & Johnson’s drug Tylenol resulted in several deaths in the early 1980s, Johnson & Johnson devised tamper proof pill bottles tops now universally used.
Locally, the National Australia Bank (ASX:NAB) became a more robust institution since it lost $360 million in an unauthorised foreign exchange trading scandal.
