Businesses that survive scandals

How 6 factors critically influence the effects of corporate scandals

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Everyone’s very quick to call almost any bad news another example of corporate scandals these days. We are in the grip it seems of “the outrage orchestra” as Chris Wren so delightfully describes it. Nevertheless, companies do get into trouble, and they emerge from those challenges in different states. Some seem to brush off what has happened while others falter. Why?

According to Amit S. Mukherjee, “Virtually every 21st century business scandal is reducible to a morality tale of a technology that allows us to do things we couldn’t before, coupled with major institutional failures that were enabled by failures of omission and commission of corporate leaders.”

Mukherjee observes that while digital technologies provide individuals with unprecedented access to make decisions, those same technologies often mean the people making the decisions do not have all the facts or cannot see the full implications of their actions. In their bid to get things done, they give the go-ahead to initiatives that have significant wider repercussions for the brands involved. Rupert Murdoch, he contends, may not have directly agreed to illegal hacking of mobile phones, but he made it possible for phones to be hacked by not setting the ethical boundaries that should have prevented anyone even contemplating the possibility.

Corporate scandals stem from culture

Larry Thompson, in an address to Brookings in 2004, put the blame for corporate scandals firmly in the camp of culture. “As those of you who work in large corporations know, companies develop their own methods that guide employees’ thoughts and actions. That culture is a web of attitudes and practices that tends to replicate and perpetuate itself beyond the tenure of any individual manager. That culture may instill respect for the law or breed contempt and malfeasance. The organization itself must be held accountable for the culture and the conduct it promotes.”

Regulation doesn’t always help

Research for Oxford University’s Faculty of Law shows an interesting relationship between regulation and corporate scandal over a 200 year period. While there is anecdotal evidence to suggest that business failures and bankruptcies prompt greater regulatory activity, the authors found that the cause and effect also works the other way: corporate scandals follow on from regulatory reform. What’s more, “Corporate misconduct and regulatory action are not isolated events, but come and go in waves … At the same time, we find no evidence that regulations can curb corporate misconduct. Rather, today’s regulations are a strong predictor of future fraudulent behavior, because firms are quick to adapt and move their activities to unregulated areas, or because regulators rely on narrowly defined rules to identify and prosecute corporate wrongdoing.”

(That said, a shift to a tougher regulatory environment isn’t always a bad thing. New rules in the marketplace can be a powerful prompt for new approaches and attitudes. Here are my thoughts on rethinking how you address shifts in compliance.)

Not all corporate scandals are the same

The temptation is to assume that since the term “scandal” is applied to a range of different situations, they must all have a similar effect on the businesses and brands concerned. It’s all controversy, right? It’s all bad press. It all leads to diminished brand loyalty? Not so, or at least not equally. While no brand wants a corporate scandal, and many businesses pay a high price immediately in terms of stock dives, recalls, corrections, legal advice and perhaps dismissals of key people if there is one, scandals themselves can affect businesses in different ways. The reaction is adverse, no question, but the level of reaction and the cost of that reaction, can appear to vary significantly. Why? I’ve identified a range of factors that individually or collectively could help decide the effect that corporate scandals have on a global business.

  1. Market dynamics – supply and demand has a significant influence on a company’s  ability to rebound. If the demand for the service is high enough and there is little perceived choice, consumers will often feel they should try to forgive. They may complain about the company on social media, but the impact on behaviours and therefore profits may be far smaller than expected. United Airlines for example took a massive hit reputationally over its recent forced removal of a passenger but nevertheless directly benefits from the fact that huge numbers of people continue to fly. According to Reputation Institute, passenger travel is expected to almost double from 3.7 billion passengers flying in 2015 to 7.2 billion flying by 2035. That, and the fact that there has been such a high degree of consolidation in the industry itself, means that attempting to avoid a significantly scaled brand like United is inconvenient at best. As The Guardian observed, “Thanks to deregulation and industry consolidation, the power relationship between airlines and customers is dramatically skewed in airlines’ favour. Carriers can basically do whatever they like and get away with it … Short of boycotting flying altogether there’s basically no way for customers to hold airlines to account. So we just hand them our money and grin and bear it. We expect airlines to be awful. And low expectations are lucrative; while airlines like to cry poor to justify incessant cost-cutting, last year global airlines made profits of $35bn.”
  1. Reputation – the degree to which corporate scandals take consumers by surprise will influence the degree to which a brand feels the heat. One of the key reasons that Volkswagen received such strong reactions to their emissions scandal was because they were such a highly regarded brand. There was a tangible sense of let-down that they had behaved the way they had. Nevertheless, the brand seems to have used the momentum of the corporate scandal to good effect—restructuring its business, rethinking processes and cutting executive remuneration to get itself back on course. They have been able to offset the damage by drawing on their brand goodwill and by acting decisively and systemically to restore their standing.
  1. Investor reaction – while every significant scandal is likely to trigger some level of short term reaction, the key interest for the market lies in the long term effects on shareholder value and underlying stock price. The fallout from the Petrobras scandal in Brazil is an example of a corporate scandal that has not only rocked a brand Brazilians were proud to call their own, but then had ongoing impacts for the sector and perhaps for investment in that part of the world. So how should investors assess the likely impacts of corporate scandals on a specific stock? Glenn Curtis suggests that rather than wait for the media and analysts to make a pronouncement, investors do their own homework. Amongst the factors he suggests that investors should consider: who was involved and to what degree (specifically, was the CEO or another decision maker implicated?); the cash that the company has to weather the storm; any insurance policies that the company may have to offset legal costs; and likely future financial impact. Faced with a scandal that could significantly impede investor confidence over the longer term, companies need to move quickly not just to address the public fallout but also to assuage investors that their money is safe and that they have the governance and risk measures in place to see things through.
  1. Resilience – a brand’s ability to move on from a scandal is critical to it achieving renewed traction in the market. While the global recall of the Note 7 device is said to have cost the Samsung brand the better part of $6billion, the company rebounded quickly with the significant success of its Galaxy S8 and S8 Plus handsets, to the point where Forbes declared, “Coupled with a positive reception from the critics, the Galaxy S8 and S8 Plus are on course to return Samsung to the top of the Android tree for the first time in nearly a year, provide a strong challenge to Apple’s current and future iPhone line-up, and to define what it means to be a smartphone in 2017.” In a world where consumers soon want to know ‘what’s next?’, the brands that can bounce back from adversity and present new, exciting and popular follow-ups will quickly re-win the confidence and interest of consumers if their underlying brand is strong enough. The secret is knowing what to respond to, when and how.
  1.  Duration – the length of time that corporate scandals remain in the news can have a detrimental effect on a brand’s ability to recover. When the documentary Blackfish brought SeaWorld Entertainment into the public eye in July 2013, the company failed to shake the adverse publicity quickly. In time of course they undertook some major changes across their business to try and reposition themselves, but by then they had already suffered significant revenue losses. And ironically, as they have moved away from their signature shows in an attempt to reinvigorate interest, attendance has continued to decline. These challenges were compounded in Florida, some suggest, by Universal upping its game in order to gain a greater share of the non-Disney vacation market. Like the passing of Ringling Bros. and Barnum & Bailey Circus, the SeaWorld brand got involved in a long-running battle that, combined with changing attitudes, has significantly affected its ability to deftly reposition and re-monetise its offering. It will be interesting to see if and how SeaWorld can re-find success or whether, like the greatest show on earth, it will find itself in a spiral that is just too fast and too far gone to escape.
  1. Impact – while many corporate scandals happen at arms-length, perhaps the most damaging are those that consumers perceive as potentially affecting them personally. The Chipotle brand for example was involved in a food safety scandal that saw hundreds of people get sick. Stories like this didn’t help. Faced with the prospect of contracting norovirus, consumers abandoned the former darling of the food sector for two simple reasons. One, they didn’t want to get sick themselves. Secondly, there were plenty of other choices available to replace the brand with. The combination of these factors saw Chipotle fall off the charts. One of the reasons this scandal had such a powerful effect on Chipotle’s brand was that consumers perceived real danger to themselves. Winning back trust in such situations requires patience and persistence. Similarly, with the Facebook-Cambridge Analytica scandal. The reason why consumers are reacting so strongly is that they feel like it’s their privacy that is under threat and their personal interactions that are being used to someone else’s gain.

Plus one more: Predilection – If the brand involved in the scandal is one that customers believe represents them and what they stand for, or it’s a brand who behaviour they applaud or endorse, then they are less likely to view whatever happens as scandalous than those who are indifferent or even antagonistic towards the brand. This didn’t work for Volkswagen because it was a brand that consumers expected to be beyond reproach, but there are plenty of brands that cultivate a ‘bad boy’ image and that talk up scandal and controversy as ways to gain and keep attention. Trying to make a scandal stick with them is much more difficult. EMI discovered this with the Sex Pistols to their cost – literally. The more that the Sex Pistols misbehaved, the more “the establishment” felt scandalised, to the total delight of punks and their sympathisers. Another example of course was when Benetton released their Unhate campaign with two leaders kissing, many consumers were unamused, whilst Benetton followers were probably nonplussed. My question though was, OK, it was scandalous (to some), but did it convert attention to dollars? In other words, was the Unhate campaign a killer app or just another sex tape?

Not all impacts are visible either

While most people associate corporate scandals with visibility, not all the effects of a corporate scandal are obvious. In an interesting article about the long-term effects of scandals, Boris Groysberg, Eric Lin, George Serafeim and Robin Abrahams looked at what happens to those businesses involved beyond the headlines. What their research reveals is that scandal by association has wider and deeper repercussions for those involved than might seem obvious, and that reputational fallout can continue for many years. Executives changing jobs from scandal-tainted companies for example are paid less than their peers and “even a company you left long ago could have an impact on your current and future job mobility. You can’t control this risk, but you can and should plan for it”.

Stigma as an effect of corporate scandal

The organisations themselves don’t go untouched either. They are affected by a concept called organisational stigma, meaning they essentially become reputational poison. The association, the authors say, can extend from a whole industry – think weapons manufacturing or tobacco – to specific companies, and can generate a wide range of reactions, from disassociation through to difficulties in attracting staff. The degree to which an organisation is stigmatised also depends on where the scandal occurs. Countries with stronger regulatory and governance systems will exhibit a greater degree of organisational stigma. In smaller countries, there is also likely to be higher awareness of who was involved and where the skeletons are buried.

What fascinated me though were the anomalies of the effects of scandals:

  • Some sectors were more susceptible to organisational stigma than others. For example, a banking scandal was likely to be less forgivable than one involving a technology company;
  • Some job functions were more highly to be affected than others – for example, those in finance-related careers were likely to take a greater hit after a scandal;
  • Senior execs were more likely to be affected than those further down the decision-making tree – which is understandable, but also ironic, in the light of Amit S. Mukherjee’s comments;
  • Women were more likely to be affected by association with a scandal than men;
  • Education, particularly elite education, could have a shielding effect; and
  • The extent that an organisation suffered from stigma depended on who was directly affected. Walmart and Amazon for example have both endured scandals around their labour practices and are stigmatised by some groups for their workplace cultures, and yet they remain popular with shareholders and customers who reap the benefits of those very same practices.

Jonathan Copulsky observed in his book Brand Resilience: Managing Risk and Recovery in a High-Speed World that brands have never been stronger nor more fragile. As transparency and scrutiny intensify, the chances of a corporate brand being involved in some level of scandal will only increase. Here are 10 situations in which you might need to ask for forgiveness.

Brand halo can be positive and negative

The key decisions for those tasked with helping a brand recover are determining the nature of the scandal and the extent to which market factors will work for, or against, the brand. That’s not to suggest for one moment that brands should try and ignore or shortcut proven techniques for crisis management. It does suggest though that, where appropriate, businesses and brands should look beyond just the process of reducing the impact of corporate scandals (a time-proven process) to examining the predilection of consumers for cues as to how they might act, how quickly and how radically to resolve the crisis they find themselves in.

As we’ve seen, there are also significant implications here for those working within organisations when a scandal breaks. Whilst culture is often cited as the main reason corporate scandals occur, the findings from the Harvard article show that the fallout from a scandal affects a much wider group than just the original culprits. Association with a scandal, however distant, can have a damaging effect on career prospects and earning power. That may be unfair, but in many ways it’s also not surprising. After all, association with a powerful brand works to many candidates’  advantage when they are looking to change jobs – they benefit directly from the ‘halo’ effect of the brand. It makes sense therefore that such a ‘halo’ can be negative if the brand itself has been compromised.

We all, it seems, are judged by the company we keep.

Updated: This article was originally published in July 2017 and has been updated in April 2018 to include more detail and discussion points. A shorter version of this article was posted elsewhere under the title 6 Factors Behind the Impact of Brand Scandals.

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