The impact of bad news Article icon


Board directors at companies where the share price fails to return to pre-crisis levels within six months of the incident are 11 per cent more likely to lose or leave their jobs than counterparts at crisis-hit companies where prices recover, new research reveals.

The global study, Knowing the risks, protecting your business, by legal firm Freshfields Bruckhaus Deringer, analysed 78 crises with reputational implications that took place from August 2007. Ironically, affected companies announced just 14 of these crises while more than half were revealed by the media.
The study found that crises fall into one of four categories, according to the type of event that acted as the initial trigger.
1 Behavioural crises are prompted by reports of questionable conduct by either the company or an employee, such as money laundering or corruption.
2 Operational crises seriously impair the company's ability to function properly, such as environmental incidents or product recalls.
3 Corporate crises affect the corporate and financial well being of an organisation, such as hostile bids or liquidity issues.
4 Informational crises affect a company's IT infrastructure or electronic data, such as hacking.
Ironically, the research found that share price movements are usually modest in the first 48 hours after news of a crisis breaks, which provides breathing space for corporate communicators to put in place crisis management protocols.
And not all companies suffer a share price movement in the immediate aftermath of a crisis becoming public. Indeed, the research revealed that fewer than half experienced a share price fall in the first day of trading but 54 per cent are impacted within two days. But six out of ten companies affected by a crisis experience a share price drop, averaging 17 per cent, four weeks after it is announced which the researchers attribute to a 'peak in negative feeling'. And the share prices of more than half of all impacted companies had not recovered to pre-crisis levels after one year.
Indeed, the number of firms that experience falls in their share price of 30 per cent or more rises from three per cent on day one to 21 per cent after one year.
But the long term fate of the share price does depend on the type of crisis that a company has to tackle, with operational and behavioural crises having the biggest impact.
Behavioural crises trigger the greatest one day falls in share prices as they tend to raise more questions about governance and, as a result, have a greater impact on corporate reputation. Shares can drop 50 per cent in the first day after news of a behavioural crisis breaks as investors start to question standards of corporate governance within the organisation. But, ironically, they are also the quickest to recover. On average, companies affected by a behavioural crisis recover their pre-crisis value after six months with shares down just two per cent at the end of the period.
The analysis found that 37 per cent of companies affected by an operational crisis, such as a product recall, suffered a share price fall on day one. But at the end of the first day, after the details of the crisis became public, no company experiencing such a crisis saw its share price fall by 30 per cent or more. However, the negative impact lasts longer than other crises with share prices down almost 15 per cent after six months.
Informational crises have the least impact on share prices. Not one of the companies surveyed saw their share price fall by more than three per cent on day one and only one in ten suffered an adverse movement. After six months, the share price of just one in seven companies that suffered an informational crisis is still affected.
Corporate crises are resolved the fastest. More than one quarter of those companies affected by a corporate crisis saw their share price fall on day one, but only one in seven was still affected after six months and none was down by 20 per cent or more.
The research found that one in ten directors at crisis hit companies left after one year while the departure rate of directors whose share prices are still impacted six months later is 15 per cent. But in those companies where the share price recovered to pre-crisis levels within six months, just four per cent of directors left the company.