‘The Perils Of Crisis Grown Companies’

While writing my PhD, I published an analysis of the pattern and consequences of crises experienced by corporate Australia during the 1990s. There were about six each year, half involved operational issues, and product defects made wholesale and retail trade the most crisis-prone sector. The most interesting finding for me was that over a quarter of companies affected by crisis did not survive beyond a few years, and many of the others faced years of rolling crises.

Not much seems to have changed. Consider a couple of prominent examples.

Over the weekend of 16 February 2015, Patties Food Group (PFL) announced recall of its popular packs of Nanna’s Mixed Berries and Raspberries after five customers contracted hepatitis. PFL was thrown into crisis and acquired the following year by Pacific Equity Partners.

On 25 October 2016, four people died on the Thunder River Rapids Ride at Dreamworld on the Gold Coast. The operator Ardent Leisure Group (ALG)  pleaded guilty to charges of breaching safety laws and was fined $3.6 million. Over the following six years, Ardent’s share price fell by two thirds while the All Ordinaries rose by a third.

On 24 August 2020 as the MeToo movement fanned sensitivity to all corporates’ culture, newly appointed CEO of AMP Capital Boe Pahari stood down after revelations of a sexual harassment payout, and was followed by resignation of the firm’s chair. AMP’s share price initially welcomed the news, but quickly sold off and has not budged since while the All Ordinaries rose 19 percent.

The chart plots price indexes of firm share price after adjusting for change in the All Ordinaries Index with week zero ending two days before crises hit the news. Share prices of companies in these crises quickly lost 10-20 percent and did not recover (although the takeover premium compensated Patties shareholders).

This pattern arises because listed companies are opaque most of the time. Shareholders can only hope they have a robust culture from board room to check out; that products meet quality standards and all customers are treated equitably; and recruiting, training and performance evaluation are right. Crises, though, create a unique opportunity to assess management capability by exposing at least part of the real situation inside companies. Those that respond constructively reveal their strength and can actually thrive. Obviously the opposite applies.   

We are seeing crises’ discipline playing out again. On 13 October this year, Medibank (MPL) announced unusual activity on its computer system and a week later revealed huge loss of customer data and hacker ransom. Its shares had lost 17 percent by the end of November as the All Ordinaries rose 9 percent. MPL is now in what climbers call the death zone where oxygen support is required to survive. The lesson of past failures that skilful navigation is required to survive a crisis is surely not lost on MPL which needs excellent management to save the day.