Do Scandals Affect Businesses?

You turn on the TV or look at the internet and see another business thrust into the spotlight for having poor business practices. It’s reported for a little while, and then you don’t hear about it again, but you do hear about another business with another scandal. It’s a common occurrence, one that begs the question: Do scandals affect businesses?

One particularly nasty scandal was the Mylan EpiPen incident. In 2016, the pharmaceutical company Mylan came under fire for raising the price of the EpiPen by 400% since 2007. The device, which costs around $20 to manufacture according to Time, is sold for $400 (and that’s on the low end). The EpiPen is also protected by a wall of patents, ensuring that no other company can manufacture the EpiPen for lower. 1 in 13 American children needs EpiPens to help ensure that they don’t die in the case of an allergic reaction. Congress brought Mylan’s CEO in front of the House Oversight Committee, and the general public’s outrage did 2 things. One was dropping Mylan’s stock to the lowest it’s been in 30 years. The other detrimental impact was Mylan’s total earnings decreasing. Mylan’s total 3rd quarter revenues were $3.06 billion in 2016, according to their 2016 Q3 reports. Their 2018 3rd quarter earnings, as reported from their 2018 Q3 reports, dropped 4%, to $2.8 billion. These weren’t the only repercussions felt by Mylan, according to Fortune, state attorneys also investigated the company, looking into whether the company committed antitrust violations or committed fraud. In October of 2016, the company settled with the Justice Department (over underpaid rebates) for $465 million.

Investopedia tells of the rise and fall of Enron. In mid-2000, Enron’s stock prices were around $90.45 a share. They were also called Fortune’s “America’s Most Innovative Company” six consecutive times from 1996-2001. In December of 2001, their shares were valued at $0.26 a piece. What could have possibly caused the stocks of Enron to fall so drastically? It was a scandal, of course. Executives of Enron used accounting loopholes, special purpose entities (temporary entities used to make sure the company is shielded from financial risks; money is often transferred into these to make sure the main company is impacted), and atrocious financial reporting to hide billions of dollars of debt (from failed deals/projects), which promptly caused the shareholders to file a $40 billion lawsuit. This, in part, lead to Enron filing for bankruptcy in December of 2001.

The company, in its plan for Reorganization, changed their name to Enron Creditors Recovery Corp., with a new mission of “reorganizing and liquidating certain of the operations of the ‘pre-bankruptcy’ Enron for the benefit of creditors.” Between 2004 and 2011, it paid it’s creditors more than $21.7 billion. Enron declared bankruptcy with $63.4 billion in assets, the largest bankruptcy in American history at that time. The impacts of this scandal were huge.

All of the corporate scandals that I found had similar results to the 2 companies above: serious repercussions, including bankruptcy, loss in earnings, and loss in stock bought. Scandals, from everything I’ve found, fiscally and legally impact companies.