It seems everywhere you turn lately, there’s another scandal looming. Wells Fargo, for instance, used to be one of the most trusted names in banking. Then it was discovered that they had opened fraudulent accounts for over 2 million of their customers, in order to hit sales quotas.
When wrongdoing is uncovered in a company that was previously thought to be trustworthy, it can cause their business to suffer. But more than that, it can have repercussions that echo through the markets. Let’s take a look at two recent corporate scandals and the impact they’ve had on the economy.
Volkswagen’s Emission Problem
The German car company has long been respected as a manufacturer of quality vehicles. However, recently they were discovered to be cheating the system, in order to make their vehicles appear to be more environmentally friendly than they actually were.
A special device installed in certain models, including some Jettas, Audis, and Beetles, was designed to sense when the vehicle was being tested for its emissions output. If the software was alerted that the car was in testing conditions, it would control its pollution and keep it within accepted parameters.
However, once on the road, the emission control would switch off, and the car would release Nitrogen Oxide at as much as 40 times more than the legal limit. Other VW vehicles had similar discrepancies when it came to their CO2 output.
Volkswagen has offered to repair all affected cars for free, but even though emissions will be within legal parameters, they’ll still be greater than advertised, leading to significantly higher fuel bills.
The electronics manufacturer has had more than its share of bad press of late. Last year, there were issues with the Galaxy Note 7, which caused the battery to overheat and even explode or catch fire. They reported that it was a result of rushing the manufacturing process, recalled the phones, and ultimately discontinued the model.
This was a major blow to the company, but it could be written off as merely a mistake. However, their most recent scandal is of a different variety. Vice Chairman Lee Jae-yong has been implicated in a scandal involving bribery, embezzlement, and perjury. Authorities have declined to arrest him over the matter, but it’s still been detrimental to the company’s reputation.
What all of this amounts to is that trust in major corporations and the people who run them has reached an all-time low. In many cases, this translates to trust in the markets as well. A few years ago, a study found that, in the wake of a corporate scandal, confidence and participation in the stock market by individuals and households declined. This applied not only to the corporation(s) involved, but to the stock market as a whole.
When it comes to investor confidence, reputation is key. Nobody wants to invest in a company with a history of cheating its customers. But when a scandal uncovers wrongdoing by a company that was previously thought to be among the most trustworthy in its field, such as Volkswagen or Wells Fargo, it makes it difficult to know whom you can trust at all anymore. As a result, the market suffers.
Unfortunately, protecting yourself and your investments against this sort of thing is difficult, because you never know when a scandal will be uncovered, or how great the repercussions will be in the markets. This is why it’s important to safeguard your investments by diversifying, and including at least one safe haven in your portfolio. That way, when scandal strikes and stocks plummet, you still have something to fall back on.