Corporate Scandals – Cauldrons of Spilt Trust

By Douglas Bryson & Glyn Atwal

Trust is a big word. In this article, the authors elaborate on the elements and issues around corporate scandals, the breakage of trust, and how all these are anchored on brand identity.

 

It could be argued, if corporations were actually people, it’s the brand that is the soul of the organisation. It is more than just made up “marketing glue” which holds the organisation together – it helps to define the corporate “personality” and conveys symbolic and emotional connections with others. Norms of interpersonal behaviour are often applied as the relationship develops between individuals and brands. Individuals develop trust and loyalty with some brands, while remaining cautiously wary of others. Thus, everyone has their own circle of trusted brands. And obviously, not everyone will like or trust a brand, furthermore, sometimes that is not even a brand’s objective.

However, when it is the objective to have more than just a market transaction, and a brand relationship sours, there are occasionally extraordinary scandals. “Triggered” critics are quick to anger, stir the pot and heat up a cauldron of anti-brand sentiment. As sorcerers of yore, they point their elongated fingers at those “manipulative professional marketers” for duping the less judicious portion of the public as to the “real nature of corporations”, i.e. vehicles of mass exploitation, often for the profit of invisible shareholders and ultimately at the expense of Mr. or Ms. Anybody, or Mother Nature. There is an undertone of an “I told you so” factor, that brands should not be trusted or anthropomorphised. Brands that attract this damaging sort of attention are categorised as malevolent. Recovery can be a long and arduous venture for the brand, if redemption is possible at all.

Anti-brand sentiment is no longer an extreme, but it’s evolved into a mainstream phenomenon, facilitated by near instantaneous communication via the web and the widespread use of social media.

There exists a wide diversity of groups that have prepared well-rehearsed mantras of criticism that include environmentalist organisations targetting energy companies and all sorts of polluters and industrial scale exploiters of the natural world, there are anti-capitalists waging wars foremost against large corporations and private financial institutions, and anti-globalists taking on global brands such as Starbucks or McDonald’s or any firm that homogenises or reduces the cultural diversity within human societies.

Increasingly, anti-brand sentiment is no longer an extreme, but it’s evolved into a mainstream phenomenon, facilitated by near instantaneous communication via the web and the widespread use of social media. Brand failures and scandals progressively seem to be omnipresent. The string of recent and high-profile corporate scandals, including Rolls-Royce, Uber, Wells Fargo, Wargaming, Volkswagen and United Airlines are not country or industry specific. Each scandal has its very own dynamic, yet a worrying common factor is that stakeholders – customers, shareholders, and media amongst others – are willing to generously “punish” the company for what is widely deemed as irresponsible or anti-social behaviour. The companies that were loudest at verbalising their “human” side of their contributions to society are the companies that suffer from the most backlash. We see these examples as brands that have failed with fundamental breaches of trust. They have spilt this precious resource given to them by customers that were led to believe there was a social side to the company, but they saw, quickly and suddenly, that the mask dropped. Perceptions of companies that were thought to respect social norms of behaviour, were abruptly fractured when customers saw or even only heard of an event that placed maximised profits before people. The perceived social relationship is shattered and brands remain as vacant symbols of companies that are transaction driven, “cold hearted” and acting in the manner opposite to which it signalled to the public. Concurrently, social media has dramatically lowered the cost to the individual of seeking what used to be considered “irrational” revenge – irrational because it cost so much to get satisfaction. Interestingly, now it doesn’t even have to be the “wronged” party to set off revenge seeking behaviour designed to chastise the brand or cause it financial harm.

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It is now so easy to get payback against a brand that misbehaves that following that so-called irrational path of human nature is easier than at any time in history. So the irrational seems much less so. It has in fact become a rational manner to control companies’ indiscretions. Behavioural economists explain revenge seeking behaviour as a socially adaptive phenomenon whereby probable severe punishment for violation of trust keeps potential perpetrators from breaking that trust. Thus social norms exist in interactions and keeping the trust leads to maintaining society in good order. We suggest that the threat of punishment of brands has swung more towards a degree of certainty in major cases, as a result of mobile telephone and social media technologies. Now revenge against a brand is conceivably minutes away from a breach of trust, a blunder or a mere act of human behaviour by a brand representative that has been interpreted as an intentional affront by a customer. Further, once the revenge seeking behaviour is started, other social media users reverberate and at times even amplify negative messages about the brand. The brand loses its costly “humanised” personality. The unpleasant face of a straight out money transaction replaces it.

 

#Boycottunited

This public reaction sent shockwaves through Wall Street that sensed that the scandal could lead to wider financial ramifications. Nearly $1 billion was temporarily wiped off the company’s market value.

A perfect example of this is the recent case of United Airlines. When a passenger was filmed being forcibly and violently (with blood) removed from an overbooked aircraft, the brand was almost immediately under intense, public scrutiny. Conversations about United quickly dominated social media and unsurprisingly, online commentary expressed very negative sentiments and a form of rapacious attack developed, sparked by collective outrage and a shared desire to punish the brand. #Boycottunited was just one of many hashtags which characterised the intensity of public outrage in this case. This public reaction sent shockwaves through Wall Street that sensed that the scandal could lead to wider financial ramifications. Nearly $1 billion was temporarily wiped off the company’s market value.

Disturbing video was first sent via social media within minutes of the incident by other passengers on the flight, igniting the media firestorm which continued in the public domain by popular network US talk show hosts, such as Jimmy Kimmel, who were quick to mock the airline. Even President Donald Trump was reported to have called the incident “horrible” in an interview with the Wall Street Journal. What had appeared to be a miserably handled, isolated incident had now attracted the attention of US policymakers. The United Airlines Chief Executive Officer Oscar Munoz was asked to attend a congressional hearing.

It was in effect a corporate crisis spun well beyond control; a domino effect exists that unexpectedly placed the company and its brand on the defensive and in financial peril. United Airlines had spent millions of dollars on a slick brand advertising campaign: “Fly the friendly skies”, and was now under the spotlight of a hostile public, viscerally revolted by what was perceived as a brand created by lying marketers spinning lies to hide the real company motive – maximising profit. Now many wonder, how can customers and potential customers “un-see” the video of a bloodied passenger being forced to debark the intentionally overbooked plane so that United employees in transit could have seats?

Some Internet users even posted new suggested slogans for United Airlines to replace their brand’s slogan with, for example “Deals that can’t be beat, passengers that can…” or “We put the hospital in hospitality.” These weren’t only typical long-standing anti-brand activists, but ordinary people who were using social media space to let off steam and make their views and opinions public. They also felt the betrayal of the promised social norms, such as being treated with dignity, by an economic decision that is trivial in the eyes of almost anybody witness to the event. One very public incident had an extensive impact on the trust people had had in the brand. The cauldron of trust boiled over with all of the heated criticism and spilt due to a hyper reactive market. No longer will people be flying “friendly skies” with United Airlines. Loyalty, trust and understanding have been replaced by a dollar amount for a specific service.

 

Internal Intangible Losses

“Experts” were quick to calculate the immediate economic cost for United Airlines, as is done with other companies that experience a fall in sales and decreased stock market value following a corporate crisis. However, this adjusted stock price fails to take into account many of the intangibles that impact corporate viability. Markets often do not behave as classical economists would like people to believe; at times their models fail to bear a resemblance to reality. The rise of the relatively new field of behavioural economics attempts to explain why people often fail to react in the manner long predicted by classical economics. Trust and reputational impact after brand failure of many high-profile brands can be felt for many years, or even prove fatal; it is just too difficult to know if trust can ever be regained, if customers can be convinced to remain or if trust is even needed. Guestimates are nonetheless attempted as many economists stick to their assumptions, dogmas and their calculus.

Nevertheless, for companies such as United Airlines, there are also the internal “human costs” that are likewise as significant as the diminished customer trust, loyalty and loss in reputation. Surprisingly, this is an omission in the business press commentary. We refer the “internal human cost” as to the loss of employee trust in, and commitment to the employing company. A public crisis might lead to a massive spiral downturn in employee morale and can leave employees angry, disoriented and demoralised. Employees at every level within the organisation can feel that senior management has let them down. For example, Volkswagen took the decision to cut 30,000 jobs in order to generate cost savings in light of the “Dieselgate” emissions scandal. It is no wonder that employees are left asking, “Why should we honest and hard-working employees pay the price for the blunders of our superiors?” Employee discontent and ultimately disenfranchisement can have an irreversible impact beyond lost productivity, but also affect key performance indicators such as innovation, loyalty, motivation to provide superior customer service, and turnover intention.

Fundamentally, customers and potential customers need to know who they are doing business with. Further, employees need to know as well. People need to know that the brand image will match the brand behaviour. Take the example of Ryanair, a low-cost airline based in Ireland. Customers are given close to no service at all. It is known to be a no frills airline; everything that can be charged as an extra, will be charged as an extra. This poses no long term problem because Europeans do not expect more from a Ryanair brand flight than an unassigned seat. Ryanair’s website focusses on cheap flights. Booking a ticket will reveal the minimum you will actually pay. You will be charged for any baggage excess and check-in agents are predictably not the sympathetic type. However, this does not harm the brand – it is just a brand of pure market transaction, not one with the social norms of trust and loyalty for superior and friendly service.

 

Beyond Textbook Solutions

Public relations experts often propose “off the shelf” advice on how to deal with the immediate fallout of corporate scandals, often providing minor tailoring to post-crisis campaigns in order to attempt to rebuild the reputation of the brand. We believe that very often these so-called “text-book” solutions are in fact far too superficial; as a marketing tactic, it is similar to using a “Band-Aid” for a broken limb, or searching for a limb that was never there. Yes, some campaigns might help to reposition the brand or at least change the conversation, but consumers are on their guard if relationships have been damaged. As with companies accused of “greenwashing”, consumers can easily detect a “Public Relations Redemption” campaign that arouses the impression of a company’s efforts at brand image salvation.

With hindsight, we have the luxury of suggesting that in the first instance executives need to take a few steps back and consider how to prevent scandals from starting. First of all, employees should be explicitly taught which social norms are being communicated and followed with customers in relation to that brand and to understand precisely what it means to break the trust if that is applicable. This understanding should guide their on-the-job behaviours. In some companies, this might involve a radical and fundamental shift in management mentality as well. There are decisions to be made regarding social norm driven relationships and brand personalities, and purely economic market driven perspectives where brands are just labels. This is simply a branding fundamental truth that is not always clear.

Failed leadership and communication about what the brand stands for provides a blind spot for employees. We suggest this is where most scandals have their roots.

It is fair to assert that no company of repute is immune from a damning corporate scandal, especially those that have chosen to build a friendly brand personality. These come with their hot cauldrons of trust, ready to spill and scald those involved in the scandal or worse. All executives need to be clear that there is a false belief that scandals are for other companies. This means that executives and managers need to closely examine internal communications within their own organisation. We suggest this is where most scandals have their roots. Failed leadership and communication about what the brand stands for provides a blind spot for employees.

We have identified three closely related questions that need to be addressed, devised following lessons from management theory and highlighted by recent corporate scandals. We believe providing top down leadership in these areas will dramatically reduce the risk of corporate blunders occurring, such as those that have plagued United Airlines, amongst others.

 

Do You Have the Right Corporate Culture?

Corporate culture is not a new idea. It refers to the instilled employee work related value system, which leads to appropriate decision-making and ultimately employee behaviour. Yet it is surprising how many top managers blindly ignore its importance. Strong corporate cultures are more reliable in determining the employees’ red line between what is deemed as being acceptable and ethical for internal and external stakeholders. For example, Samsung was under immense competitive pressure to counterattack the unshakable success of Apple’s iPhone. Did excessive time pressure cultivate a “work culture of negligence” which led to a premature market launch and recall of the now infamous exploding Galaxy Note 7? Then there are companies driven to extremes in search of growth. Volkswagen was resolute to become the world’s biggest car manufacturer and identified the US diesel vehicle market as a market growth opportunity. Executives were evaluated on meeting ambitious growth targets. Did this instil a culture of “growth at all costs” at Volkswagen that resulted into the diesel emission scandal? In a similar disposition, Wells Fargo’s incentive structure had put excessive value on bank retail employees meeting aggressive sales targets. Did a culture of “results at all costs” lead to the opening of two million fake bank and credit card accounts?

The Volkswagen emissions scandal started on 18 September 2015 when the US Environmental Protection Agency found that Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate some emissions controls only during laboratory emissions testing. 

Executives certainly need to cultivate a strong corporate culture that considers long-term results, but a deeper examination of corporate values, their nature, focusses and priorities, might avoid the scalds that the company suffers when employees misstep due to unreasonable, poorly prioritised or conflicting values as signalled by managers. This failure results into employees bumbling, acting irresponsibly and damaging the brand. Executives need to explicitly question whether goals regarding relationships with society and customers, methods and results are not driven by short-term objectives. Brands that survive have the most potential to add value, and the corporate culture needs to be clear and sustainable. Obviously, this is an issue that must be negotiated with other stakeholders, particularly investors who may exert pressure for companies to deliver immediate returns. Employees need to know what the overall long-term values of the company are, and this means CEOs need to ensure the appropriate corporate culture is encouraged at all levels of the organisation.

 

Do You Have Managers or Leaders, or Both?

This is also very much tied in with the corporate culture in that the answer sets the tone of communication throughout the organisation. Strong leadership is undoubtedly essential for an organisation’s success. However, this is too often misinterpreted as a top-down chain of command in which open communication across management hierarchies, ideas, dissent and grievances are uncommon or even absent. We and many others argue that effective leadership in a hierarchy requires a different set of behaviours. Employees look for guidance on desired behaviours and shared values from superiors. This basic idea, that leadership is more than management, and includes communication by setting the appropriate examples for values and behaviours is indeed taught in business schools, but despite this, all too often it is punished in actual practice. Ingrained corporate hierarchies often stifle natural leadership growth and ignore the important roles of coaching and mentoring.

Leaders need not only to embody the values of the organisation, but seek to communicate, and seek to receive different perspectives within a climate of mutual respect.

Clearly, leaders have to do more than merely meet financial objectives. Managers can do that. Leaders need not only to embody the values of the organisation, but seek to communicate, and seek to receive different perspectives within a climate of mutual respect. A leadership style that remains “open”, i.e. one that rejects the discussion stopping statement “I know”, as opposed to “closed”, will ensure that issues are not only openly communicated but improve the level and quality of overall decision-making. Well, this is how the theory goes and it is largely based on relatively flexible military, hierarchical organisations dating from World War II.

Obviously, executives need a more sophisticated palate that has been developed since the 1940s which also considers backgrounds such as national context(s), industrial context, organisational role, size, employees’ skill sets, teamwork requirements, and numerous other variables specific to the leader’s purview. However, after a detailed analysis of each case has been made, we suggest the question is posed: “Do you have managers or leaders, or both?”

 

Do You Have Effective Checks and Balances?

In order to avoid crises, solid corporate governance is needed. This requires a range of “hardwired” checks and balances to order to be effective. For example, US and UK companies rely on a single board of directors to hold management to account. This in theory should ensure oversight of corporate social responsibility and compliance to an ethics charter. However, all of this can only be possible if the board of directors has the authority to enforce oversight activities, which also implies that boards should not become too lackadaisical in their role or too trusting of incumbent top management. Corporate “cosiness” has often been one reason cited when directors have failed to act on potential or actual wrongdoings. A greater emphasis on the diversity and an increase in the number of independent directors can also act as a safeguard and help to ensure scrutiny is sufficient and items requiring action will seriously be dealt with.

Employees need to be empowered to report wrongdoings in a way that will never hamper their career development.

However, good governance needs to be integral to all organisational policies and procedures. Although legal complexities continue to muddle the legal status of “whistle-blowers”, corporations need to recognise that these individuals are an asset to staying on the safe end of critical issues. Since they are on the front-line, best placed to find problems, they should be safe in their jobs to “red flag” potential or actual illegal or unethical activities, which if not caught early, might boil over with time. As cliché as it sounds, employees need more than encouragement. They need to be empowered to report wrongdoings in a way that will never hamper their career development. If ever an employee is harmed when trying to help maintain legal or ethical compliance, it goes without saying that all future transactions will not be based on societal norms, such as trust and loyalty, but they become economic transactions where any really dangerous legal or ethical violations are somehow “not noticed”. Ask yourself “what price you would charge your employer to be held back in your career, passed over for promotions and raises, or even let go for no apparent reason?” Clearly, that price will never be paid – who would ask for it? – thus, the function of whistle-blower would never be fulfilled.

Corporations with a positive whistle-blower policy are also likely to value and exhibit a more “openly communicative” corporate culture. Suppression of whistle-blower behaviour can only send mixed messages, or worse, about company legal and ethical compliance. For example, the Chief Executive Officer Jes Staley of Barclays has faced immense pressure over his attempts to go against company policy and unmask a “whistle-blower” at the bank. Ultimately, the whistle-blower remains safely protected, while Staley has been investigated and reprimanded by the bank. CEOs do not walk on water in serious companies with healthy corporate cultures.

 

Staying Cool and Keeping the Trust

While every “known” company or brand is increasingly susceptible to a rapidly developing scandal, we argue that if organisations are equipped with the right set of values framed in a strong corporate culture, led and managed appropriately for the organisational context, they are more likely to be able to prevent scandals through the very act of being transparent and behaving as they suggest they will. The value congruence of the corporate brand’s personality, with the organisational culture and actual actions, are keys in keeping the cauldron of trust cool, avoiding crises, scandals and scalds. To act otherwise rapidly opens the door to communication failures within and outside of the company. When people don’t know how to interact with a brand, they will at the very least likely avoid it.

Featured Image: CEO Oscar Munoz testifies before the House Transportation and Infrastructure Committee about oversight of US airline customer service. Photo Coutesy: http://www.cnbc.com

About the Authors

Douglas Bryson is Professor (Titulaire 1) at Rennes School Business, France. His expertise focusses on Research Methods & Data Analysis, Consumer Behaviour and International Brand Management. Prior to switching to academia, Douglas worked for the Department of National Defense, Maritime Command, in Canada.

 

Glyn Atwal is Associate Professor of Marketing at Burgundy School of Business, an international Graduate School of the French network of Grandes Ecoles. His teaching, research, and consultancy expertise focusses on Brand Management. Prior to academia, Glyn worked for Saatchi & Saatchi, Young & Rubicam, and Publicis.

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