Corporate disasters – what can Volkswagen learn from the mistakes of the past?

The recent Volkswagen scandal, in which the car manufacturer manipulated their emissions tests is one of the highest profile corporate disasters of recent times.

In the aftermath, millions of cars  were recalled, and the share price of the company dropped by around a third. Whilst the company’s chief executive, Marin Winterkorn, resigned it is unclear whether this will have a material effect on the company being able to recover due to the reputational damage caused.

Corporate disasters of the past indicate that it is very difficult for a business’s share price and long term fortunes to be restored.

Enron

Arguably the greatest and most well-known corporate disaster was the collapse of Enron, an American commodities and services company. Enron filed for bankruptcy in 2001, after multiple fraud and corruption scandals. These included mass insider trading – to the tune of over $1 billion, and a number of bogus accounting practices used to mask liabilities from the company’s balance sheet and make the company look more profitable.

In August 2000, when the share price was at a historic high of $90.56, a number of Enron executives sold off their stock fully aware that the financial reporting of the company was inaccurate. The aftermath resulted in the company’s former chief executive, Jeffrey Skilling, being sentenced to 24 years in prison.

The breadth of the Enron scandal was so great that it affected a number of other stakeholders in corporate America. Arthur Andersen, the company’s auditors, had a number of related lawsuits raised against them. This led to a long dissolution process. The consultancy side of Arthur Andersen’s business was renamed and rebranded to what we now know as Accenture.

Additionally, the collapse of Enron was one of the pivotal corporate scandals that led to the creation of the Sarbanes-Oxley Act, a major corporate governance document listing requirements for American public companies.

BP

BP became embroiled in a major environmental disaster in 2010, when one of their oil wells exploded in the Gulf of Mexico. The US Government estimated that 4.9 millions barrels were leaked in total. The effects were immediate and long lasting – 11 BP workers were killed, and significant damage was done to the local environment, with sea life and local wildlife being washed up on the beaches in the surrounding areas.

The environmental disaster resulted in BP’s share price dropping by 53% to 305p, and the company was put under increasing pressure to not pay out a dividend to shareholders. The depression in the share price was also affected by global negative media coverage including President Obama saying that he would “make BP pay” for the oil spill damage.

The company responded by setting up a mass clean up operation and setting aside a $20 billion compensation fund. Tony Hayward, the company’s chief executive, was dismissed shortly after the disaster.

In July 2015 BP were ordered to pay a record fine of $18.7 billion to the US Government, and five states affected by the damage. The market responded by the company’s share price rising 4.5%, due to investors being relieved that the fine was not higher. The share price is currently around 330p which is around a 49% drop from prior to when the oil spill took place. It is feasible that BP may never fully recover.

Cadburys

In 2003 Cadburys became embroiled in a nation wide scandal, and PR disaster, whilst marketing their Get Active campaign. The promotion encouraged consumers to purchase Cadbury products in return for tokens, which could be redeemed against schools sports equipment. The campaign was endorsed by Richard Caborn, the sports minister of the time, alongside a number of leading athletes. The scheme massively backfired when The Food Commission, and the media at large, reported that the Get Active campaign was paradoxical in trying to reach its goal of encouraging healthy living. One newspaper calculated that 5,440 bars of chocolate would have to be consumed in order to redeem a set of posts and nets for volleyball.

Cadburys were able to successfully overcome the negative publicity surrounding the campaign by dropping it, and hiring a specialist PR agency to counter the collateral damage. Seven years later, in 2010, the company was acquired by UK food and drink company Kraft. Whilst the takeover of Cadbury was hostile, Kraft had to make a number of increased bids in order to entice shareholders to sell. The premium paid suggested a good return for shareholders, with the Cadbury brand remaining apparently untarnished by its PR disaster from the early noughties. It remains to be seen what the future prospects of Cadburys are now that is in the hands of an American custodian.

Nick Levine is a chartered accountant and freelance journalist, with a background in fin-tech who has written for Accounting Technician magazine.