Ripple effects: Crises and share value

Image: Canva


Dr. Tony Jaques quotes the Crisis Value Erosion Index report by SenateSHJ, revealing the significant effect of crises on share prices and recovery time, as well as the role of top management

Why share value matters for assessing crisis effect 

Falling share value isn’t the only consequence of a crisis – and many organisations which suffer a crisis are not publicly listed. But it’s the most immediate and visible measure of effect, especially on reputation and financial performance.

New research from communication consultants SenateSHJ highlights the share value effect of major corporate crises and the time taken to recover from reputational and financial damage.

The Crisis Value Erosion Index report analyses 70 high-profile crises over 40 years – in Australia and overseas – and reveals share price losses ranging up to 50 per cent. The report shows the average drop in share price was 12 per cent, with double that loss (24.4 per cent) for crises involving casualties or environmental damage.

Modelling metrics including share price and earnings per share, the report showed shares took an average of 60 days to recover, but for some companies, that took years, and some never recovered, or were driven into bankruptcy.

The SenateSHJ report also found that companies where the CEO remained after a crisis experienced an average drop in share price of 11.1 per cent, whereas companies where CEOs did resign averaged a 21.2 per cent fall.

The role of top management in a crisis should never be underestimated. Take the case of British Petroleum (BP) in the UK, where the Crisis Value Erosion Index identified a 50.2 per cent share loss (€12 billion in a single day) after the Deepwater Horizon crisis in 2010. Late last year, BP was in the news again. Already under pressure because of massive profits and executive bonuses from rising petrol prices due to the war in Ukraine, the CEO was sacked following workplace flings, and the company’s share value fell by AUD 3.6 billion. 

In fact, an American study found companies suffered an average shareholder loss of USD 226 million in the three days after the announcement of arrests, lies or extramarital affairs of top executives. And stock prices overall fell between 11 per cent and 14 per cent in the subsequent 12 months.

Rogue CEOs can certainly cause reputational crises and destroy share value, as when Tesla shares lost USD two billion after Elon Musk called one of the Thai cave rescuers a paedophile.

But perhaps the mother of all recent CEO-induced crises was in August last year, when Vishal Garg, CEO of US-based Better, an online mortgage lender, sacked 900 workers at a zoom meeting following a merger. The company’s shares fell an extraordinary 93 per cent or around USD 13 billion, on the first day of trading. 

However, it’s operational crises that are most likely to see heavy share losses, like the two massive Australian data breaches in 2022.

First came the data breach at Optus, which affected up to 10 million current and former customers, or about a third of Australia's population. Shares in Singtel, the Singapore-owned parent company, fell 2.2 per cent and reportedly ended plans to sell off part of its Australian telecom operation.

Just weeks later, giant health insurer Medibank also suffered a major breach when cyber-hackers compromised the personal information of its four million customers. Medibank shares fell more than 18 per cent in a day, shedding about AUD 1.8 billion.

While such losses are a shock, those totals pale in comparison with what happened at Google parent Alphabet in February, after the launch of its new AI platform, Gemini, produced offensive outputs. There were doubtless other factors, but shareholder confidence was rocked and Alphabet stock lost USD 90 billion in a day.

Technically, a falling share price is a loss to investors, not the company itself. But when shares collapse after a crisis it’s a massive blow to corporate reputation, as well as having a very real effect on other areas such as financing capacity, performance bonuses, staff recruitment and retention, shareholder and customer loyalty, debt repayment and the potential loss of government contracts and brand value. 

Falling share value isn’t the only consequence of a crisis, but it surely is a critical risk.