What’s the corporate cost of a crisis?

There is an enormous literature on crises, how to manage them and their impacts on brands, reputations and managerial longevity.

A new research project, Crisis Value Erosion, by consultancy Senate SHJ has added another dimension by looking at the impact crises have on key financial indicators over extended periods.

They find that 70% of listed companies studied experienced a drop in share price; the average share price drop was 19%; median earnings per share drop was 143%; on average share prices took 147 days to recover; and crises involving environmental damage resulted in an average share price drop of 35.1% compared to crises involving casualties which saw an average share price drop of 24.4%.

This last finding may suggest investors are getting more concerned about the environment or that just that a few deaths – particularly if they occur in some far off place – are less of a worry.

The crises from which the Senate SHJ data is drawn is long and a good reminder that the public has good reasons to distrust large companies.

The survey sample included the 2008-2015 VW emissions scandal; Equifax data breach 2015; Boeing 737 Max crashes 2018-20; Wells Fargo accounting scandal 2016-2018; United Airlines passenger defamation 2017; Tesco accounting scandal 20145; Samsung exploding phones 2016; Rio Tinto Indigenous site destruction 2020; VW racists ad 2020; Airbus bribery scandal 2019-29; Credit Suisse corporate spying scandal 2019; Facebook Free Basics privacy issues 2016; Facebook and Cambridge Analytic issue 2013-2018; Nissan CEI accounting scandal 2018-2019; Marriott data breach 2018; Bayer cancer crisis 2016-2017; P&G false advertising 2015; Apple battery blowout 2016-2017; BP Oil Deepwater Horizon explosion and oil spill 2010; H&M racist ad 2018; Zoom security failure 2020; Capitol One data breach 2019; Ardent Leisure theme park deaths 2016; Union Carbine gas leak 1984-1989; Insys Therapeutics opioid crisis 2020; Air China prejudice precautions 2016; Malaysian Airlines MH370 disappearance 2014; Adidas congratulatory email fail 2017; and Baidu search result controversy 2016.

While the research doesn’t compare and contrast the events with the content of the various vision, ethics, corporate statements featured in the companies’ annual reports and websites that would be a very interesting project for some bright young researcher to undertake.

As for the Senate SHJ research the consultancy developed a model using metrics such as share price drop, earnings to share drop, days to recovery to pre-crisis levels and trend adjusted recovery to assess the impact on the companies.

The research also looked at responses including resignations, fines, compensation and communication strategies.

Senate SHJ Partner, Craig Badings, said mining and materials businesses experienced the highest average share price drop by industry.

“For example, in cases where company CEOs resigned the share price dropped by an average of 36.6%. However, when they did not resign, the drop was only 11.1%. In saying that the nature of the crisis itself impacts on the likelihood of the CEO resigning and a resignation may also trigger a greater reaction from shareholders,” he said.

The research follows an earlier Senate SHJ qualitative survey of Australian and New Zealand executives’ experience of managing crises.

That research asked about identification of a crisis in advance and only 31% said the organisation had planned for it and was prepared for it while 24% said a risk was pre-identified but not planned for.

The majority of responses in this survey agreed that the crisis set the business back financially but many said internal impacts such as the ability to retain staff and negative impacts on culture were also significant.

Looming around the world there are some obvious corporate crises possible. The GE case study Senate SHJ used in its latest research is a reminder of the possibility of similar disasters in the future with many CEOs having paid too much at times of record low interest rates for targets which may result in value destruction, crises including massive goodwill write-offs or even bankruptcies.

What’s the betting Elon Musk and Twitter might be on any list of those to whom this might happen?