Stock Prices Can Plummet Too! What Are The Negative Impacts of Corporate Scandals and How to Respond

Many people have probably heard news stories about companies experiencing a stock price plunge after a scandal.
Not only will a stock price crash have a negative impact on fundraising and other aspects, but if a scandal occurs, it could also lead to a simple deterioration in performance due to a damaged image.
In this article, we’ll introduce the negative impacts of corporate scandals, including stock price crashes, and the measures companies can take to address them.

1. Will a scandal cause a stock market crash?

As mentioned above, when a company is involved in a scandal, it can lose the trust of customers, business partners, and other stakeholders. In some cases, the company may even have to suspend services in order to respond, which can lead to declining performance.
This can have a major impact on corporate activities, and one of the risks is a collapse of stock prices.

1-1. The impact of a stock market crash

If a scandal causes the stock market to crash, the company’s valuation declines, and the amount raised through issuing stock can drop significantly.
In addition, banks may interpret the plunge as a sign of weak performance and cut off financing.
There is also a possibility that, while the stock price remains plummeting, the company could become an acquisition target, so the risk of being bought by another company cannot be ruled out.

1-2. Other risks caused by scandals

When a company loses trust due to a scandal, it can affect not only performance but also talent acquisition.
A damaged reputation may reduce the number of job applicants and make it harder to secure strong talent. It may also lead to resignations, driven by employee distrust or anxiety about management.

2. Common types of corporate scandals

There are several common patterns of scandals that can occur within companies. Below are some representative examples.

2-1. Information leaks

First, there is leakage of confidential corporate information.
Causes vary, including employees or former employees taking data out, human error such as sending information to the wrong recipient, or external attacks such as unauthorized access. In particular, leaks of customer personal information can severely damage trust and escalate into a major crisis.

2-2. Fraudulent accounting or embezzlement

Another pattern includes fraudulent accounting such as tax evasion or financial statement fraud, as well as employee embezzlement or theft of company property.
Fraudulent accounting is widely recognized as a serious scandal. Embezzlement also causes not only direct financial loss, but can impact stakeholders such as shareholders and business partners, and typically requires strict investigation and disciplinary action.

2-3. Inappropriate employee conduct or criminal activity

In today’s internet-driven society, a frequent issue is inappropriate employee behavior or remarks on social media.
In addition, if an employee commits a crime outside the workplace, and media coverage or online information reveals the employer, it can also become a corporate scandal that damages the company’s reputation.

3. Causes of scandals and prevention measures

As described above, scandals can be triggered by a variety of causes, such as:

Some of these causes can be prevented through company initiatives such as the following.

3-1. Prevention measure 1: Internal training and rule-setting

First, establish clear internal rules related to compliance and information management, such as restrictions on taking equipment out of the office or guidelines for social media posting.
In addition, providing regular compliance training to all employees helps reinforce why these rules matter and raises awareness across the organization.

3-2. Prevention measure 2: Internal reporting system

Introducing an internal reporting system can also be effective, allowing wrongdoing to be detected and addressed quickly.
It is also important to inform employees that if the requirements for whistleblowing are met, the Whistleblower Protection Act prohibits any adverse treatment (such as dismissal) of the whistleblower . In order to protect employees, we must create an environment where they can make internal reports with peace of mind.

3-3. Prevention measure 3: Conduct audits

To strengthen compliance, it can also be helpful to conduct internal or external audits, even if the company is not publicly listed.
Especially when misconduct is discovered, external audits are recommended in order to confirm facts and root causes and to prevent recurrence.

4. Response is critical when a scandal occurs

Preventing scandals is the most important goal. However, it is also essential to understand the importance of how to respond if a scandal occurs.
If the response is mishandled, it may lead to secondary damage or further backlash and outrage.
A typical response flow and key points include the following.

4-1. Fact-finding and apology

If there are victims, it is important to apologize and disclose information to them and to stakeholders such as shareholders.
However, apologizing without fully understanding the facts can backfire.
First, investigate and confirm the facts, then clearly disclose what happened and what actions will be taken, along with an appropriate apology.

4-2. Develop and disclose measures to prevent recurrence

Once the cause is identified, consider and implement preventive measures to stop the issue from happening again.
Recurrence prevention is important for the company itself, and publicly sharing preventive actions can also support trust recovery.

4-3. Consult a specialized firm

Recovering a company’s image after it has been damaged can be extremely difficult.
In today’s world, where social media is widespread, scandals can spread rapidly, leading to online backlash and reputational harm.
To address these risks and prevent recurrence more effectively, it is recommended to consult a specialized firm that deals with online crises and reputational damage.
Such firms can quickly address the root causes of reputational decline and implement monitoring measures to manage ongoing risks.

5. Leave scandal-related reputational risk measures to “Brand Cloud”

If a company is involved in a scandal, it can have a major impact on its management, including a drop in sales and damage to its reputation due to a damaged image.
A stock price plunge is one possible outcome, which is why responding appropriately to scandals is critical.
If you want to be prepared for these risks, please consider Brand Cloud.
We offer services such as Brand Lifting services based on a systematic approach developed in the United States using statistical methods, as well as Brand Security, which addresses reputational risk at its root.
In addition to positive initiatives that improve branding, reputation, and awareness, we also provide Brand Cloud’s unique measures to improve and prevent negative harms such as defamation and reputational damage, adapting to constantly changing internet algorithms.
With a high success rate and extensive know-how, Brand Cloud’s strength is protecting corporate activities from a wide range of online issues.
When scandals occur, people may search for the company and information may spread on social media, causing harmful content to expand across many places online.
Brand Cloud also offers a free assessment that can comprehensively investigate these types of risks. Please feel free to try it first.

6. Summary

In this article, we introduced corporate scandals, which can cause various negative impacts such as stock price plunges, as well as prevention measures and response strategies.
Because scandals can have many different causes, daily prevention efforts are important. In addition, proper response in the event of an incident is also essential to avoid a stock price crash.
If you are struggling with reputational damage or negative rumors due to scandals or other issues, please contact Brand Cloud.