What crises spook markets most

New research into the relationship between an organisational crisis and its effect on share price and executive retention has shown that crises regularly cost executives their jobs.

International law firm Freshfields Bruckhaus Derringer recently examined 78 major reputation crises across 16 stock exchanges, including New York, London and Australia, and found not only a share price hit but an increased departure rate among executives in companies which were less able to resolve a crisis.

‘Behavioural’ crises triggered by companies acting illegally or questionably spooks investors the most and can cause share price crashes by 50 per cent or more on the day they become public. ‘Operational’ crises which impair a company’s ability to function were reported as having a modest impact in the first 48 hours, but typically cause the greatest long-term effect on shares.

The departure rate of senior executives from companies which suffered a share price hit averaged almost 10 per cent within a year of the crisis breaking.

Chris Pugh, global head of disputes at Freshfields, said that “directors that can withstand the storm and guide their organisations to calmer waters are much more secure in their roles.”

Read more about the study here.