Never underestimate the crippling cost of a crisis

With cyber-attacks in the headlines, a new report provides a gloomy reminder of the deep and long-lasting impact when things go wrong in public corporations, writes Tony Jaques. 

Fresh analysis by SenateSHJ showed companies struck by a crisis suffered, on average, a drop in share price by 19% and share value took 147 days to recover. Moreover, crises involving environmental damage resulted in almost twice as severe an impact on the average share price.

The cost of crises increasingly features in the headlines. For example, when Facebook, WhatsApp, and Instagram had a six-hour global outage late last year, Facebook shares fell by 5%, costing founder Mark Zuckerberg an estimated $US6 billion in personal wealth.
 
And after hackers stole data from Medibank in October, its shares fell 15% in one day after a week-long trading halt. The company, which reportedly did not have cyber insurance, initially estimated the cyberattack would cost it between $25 million and $35 million before potential remediation, regulatory, or litigation impacts.

Some high-profile crises over the years show the cost impact can be staggering. 

• BHP Billiton lost $8.9 billion of market value in a single day when the Brazilian government announced a mega-claim against the company arising from the Samarco dam collapse.
• Two 737 Max airliner crashes cost Boeing more than $US20 billion, including payments to the families of those killed, with a further $US200 million penalty just weeks ago for a misleading media release.
• After Goldman Sachs was accused of fraud, its shares lost $US12.4 billion in one afternoon and $US20 billion in a week.
• The notorious Toyota vehicle recall saw the carmaker's shares on Tokyo Exchange fall $US30 billion over four weeks 
• Following its failure to cap its leaking Gulf of Mexico oil well, BP shares lost £12 billion in one day. Record fines and other costs from the disaster were calculated at about $US54 billion.

Of course, shocking crisis losses don’t just impact massive multinationals. In the wake of the fatal accident at Dreamworld on the Gold Coast, shares in parent company Ardent Leisure fell by up to 22% the next day, slashing about $200 million from market value, and have never fully recovered.

And when an Australian anti-coal activist issued a fake news release adversely affecting Whitehaven Coal, their share price collapsed, wiping more than $314 million off the value of the company before the forgery was exposed. The share price largely recovered by day's end, but not before many investors lost almost 9% by selling on the false report.

A famous Melbourne University review of Australian crises over a decade revealed one in four of the crises incurred direct costs over $100 million, and more than a quarter of the companies affected by a crisis did not survive.

Similarly, a more recent American study found companies suffered an average shareholder loss of $US226 million in the three days after the announcement of arrests, lies, or extramarital affairs of top executives. And stock prices overall fell between 11% and 14% in the subsequent 12 months.

By contrast, the new research by SenateSHJ, which analysed 30 high-profile crises over 40 years, didn't just review headline changes in share value. It also examined the drop in earnings per share and the financial impact of other factors, including executive resignations, whether compensation was offered, and differences between categories of crises.

In addition, a parallel study by SenateSHJ interviewed managers where a crisis had occurred and found only 31% said the organisation had planned and was prepared, while 24% said the risk was pre-identified but not planned for.

Former US President George W. Bush once famously said, "They misunderestimated me." While research consistently shows that too many companies still fail to prepare for disaster, there simply is no excuse to "misunderestimate" the terrible financial impact of a corporate crisis.

Tony Jaques is an expert on issue and crisis management and risk communication. He is Director of Melbourne-based consultancy Issue Outcomes.