Expensive Mistakes: The High Price of Office Abuse

It is ALWAYS a good idea to have well-thought-out anti-harassment policies in your workplace (and enforcing them is even more important!). However, of all the reason why this is a good idea (like not having a traumatized workforce), we’re here today to talk about money. It turns out that when you’re a publicly traded company, misconduct really doesn’t pay.

“Just the Facts, Ma’am”

A study titled “#MeToo: Sexual harassment and company value” was recently conducted by the Journal of Corporate Finance on almost 200 sexual harassment scandals. They looked at scandals happening between 2009-2015. The findings? That for these publicly traded companies (including many big names like Amazon, Google, Disney, The New York Times, and Fox News) scandals went hand-in-hand with an average loss of 450 million dollars in company value. Even for a big company, that’s no small change from your piggy bank.

A team of Danish researchers conducted the study using English-language news archives to track sexual harassment scandals. While only 78% of these companies were based in the US, the other 18% were still in English-speaking countries. And now that we know what the study looked like, let’s look at what it found.

They’re Bad

The study states that “the average effect of a sexual harassment scandal is significantly negative and robust, with around 1.5% abnormal decrease in market value over the event day and the following trading day.” (This 1.5% decrease is in the average amount of 450 million dollars, which we mentioned earlier.) A follow-up article on the study by Psych News Daily states that “in the long term, companies hit by such a scandal recovered only about half of that lost market value. The long-term average was a 0.8% loss, worth on average about $250 million.”

It is also worth noting that the bulk of the financial damage comes from the public’s reaction rather than from costs incurred within the company itself (investigations, work time missed by involved parties, litigation costs, etc.).

It’s Even Worse When It’s the CEO

Since these financial losses are tied so inextricably to the public image of the company, it tracks that the figurehead of the company doing “dastardly deeds” would be downright expensive. In fact, it looks like having a CEO involved (especially if it included significant media coverage) added an extra 5% drop to the value of the company. Ouch!

The Effects of #MeToo

While a post-#MeToo era may assume that the damages companies faced would have been inflated by the swell in national ire and awareness that were brought by the movement, that would be inaccurate. It is true that the number of reported instances certainly increased drastically after October 2017, when the #MeToo movement is considered to have officially begun. However, the actual financial harm done to companies remained the same both before and after this landmark date.

How Things Could Have Gone Better

According to the study, instances where the organization disclosed the issue to the public themselves (rather than waiting for the inevitable social media storm to arrive all its own) saw a reduction in the colossal amount of damage. In cases where a CEO was responsible for the harassment, companies also fared better overall when the CEO left the organization. Basically, reactions that were interpreted as having taken responsibility and actually dealing with the situation were financially rewarded by the public. Turns out, people feel better buying from a company they respect!

In Conclusion

While it is obviously preferable for these kinds of events to never happen in your company, this study is an eye-opening example of why it is so important to have harassment policies set in place in advance that can help prevent the myriad of catastrophes. And if an accusation of misconduct ever does arise, don’t be tempted by the desire to not hold a proper investigation, bury the incident, or retaliate. It could cost your company’s reputation, your job, or maybe even 450 million dollars’ worth of break room snacks.

For more information about the study, see below:

“#MeToo: Sexual harassment and company value”

By: Mads Borelli-Kjaer, Laurids Moehl Schack, and Ulf Nielsson

Journal of Corporate Finance

Published: January 6, 2021

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Featured Image by Rebecca Sidebotham.