Do scandals really affect a company's reputation?

Being seen as a good corporate citizen is something companies often strive for. The thinking goes that a strong reputation can help attract and retain customers, talented employees, and investors alike.

Such ideas help explain why ESG (environmental, social and governance) reporting is now firmly in the mainstream. It is also the reason why financial industry professionals tend to insist that corporate bad behaviour leads to a decline in share price and why marketing executives spend so much time worrying how consumers will respond to negative news stories involving their firm.

The idea that irresponsible behaviour has a negative effect on reputation was famously noted by Berkshire Hathaway CEO and investment legend Warren Buffett when he said: “It takes 20 years to build a reputation and five minutes to destroy it.”

Now, in the age of social media, that timeline might be even shorter. And yet, the evidence that reputation is fragile is limited, as very few studies have measured reputation damage. So, is this idea really accurate? What if it isn’t, or at least, not all of the time?

My colleagues Giulio Nardella, Stephen Brammer and I set out to test the relationship between a company’s ‘irresponsible’ actions and its reputation and found that it depends, to a large extent, on what that reputation is to start with. We tend to assume reputations are vulnerable, but what we found is that this isn’t always the case.

We began our research by turning to Fortune magazine’s World’s Most Admired Companies survey, which asks thousands of financial analysts, company executives, and directors to identify the firms in their sector with the strongest reputations. Apple has topped the ranking for 14 years in a row.

We then compared the survey data with media reporting information on corporate social irresponsibility to identify where there had been any irresponsible events involving the ranked companies and then tracked the effect in Fortune's annual ranking.

For any negative news or scandals we found, we further looked to see if they had involved one of three key factors: if a firm was found culpable for irresponsible conduct by a court of law; if a non-complicit stakeholder group was harmed in some way – ie those that are defenceless and vulnerable like children, the disabled or from a low socioeconomic background; or if the effect of the event was otherwise undesirable.

Contrary to the findings of previous studies, we found that an irresponsible corporate conduct, on its own, did not lead to any damage to reputations. However, if one of the three factors was present, then there was an impact, although, this too varied.

A court ruling against a company tended to be associated with negative changes in reputation, but harming a vulnerable group did not have a significant impact. In fact, undesirable media stories tended to be associated with a positive change to reputation.

A good example is the litany of media stories exposing fashion brands and clothes retailers, such as Nike, Zara, Gap and H&M, using child labour in developing countries to make their products.

These stories have been appearing in the media since the late 1990s, but they seem to have no effect on their reputation. It may be that stakeholders find it difficult to attribute culpability to a company because they outsource the responsibility of the production of goods to suppliers overseas.

Nike was recently accused of using slave labour, with its Chinese suppliers revealed to be colluding with the Government to imprison and use Uyghurs – the oppressed Turkish-speaking minority who live in China’s far west – in their sweatshops against their will.

But this again failed to impact on Nike's reputation, or the other firms caught up in the scandal. This may be partly explained by companies putting a lot of effort into more socially responsible actions after a scandal hits the headlines.

Importantly though, the results varied by company, with much hinging on existing perceptions of how socially ‘responsible’ the firm was to begin with. Apple may be the perennial leader in Fortune’s most admired company list, but it has been embroiled in plenty of controversies, such as the working conditions of its main iPhone manufacturer Foxconn that has led to many suicides. But, because of its strong past reputation, such scandals have failed to significantly take the shine off Apple’s brand.

Stakeholders often seem to give firms ‘the benefit of the doubt’, particularly if they already have a favourable view of that business. If a firm’s culpability is confirmed by a court, then top social performing firms do suffer a drop in reputation as they are seen to be hypocritical, but without that court-determined culpability stakeholders tend to perceive firms with a good reputation as innocent until proven guilty.

In essence, there is a 'halo effect' on these businesses, whereby past investments in social responsibility offer some protection to firm reputation.

In contrast, firms that are seen as the least socially responsible suffer further damage to their reputation when accused of irresponsibility, whether or not their culpability has been proved by a court of law. Firms with low social performance incurred the most substantial damage to their reputations when an irresponsible event was associated with harming vulnerable people, without evidence of significant harm to them or corporate culpability identified by the courts.

An example of this could be the tobacco industry. The likes of British American Tobacco and Imperial Tobacco are constantly accused of irresponsible behaviour and experience customer boycotts and stakeholder distrust despite not always being found culpable by law of allegations associated with harming vulnerable parties – such as accusations of using child labour and the mistreatment of employees in developing countries.

Broadly speaking then, these results – the first systematic, large-scale empirical examination of the effect of corporate social irresponsibility on reputation – suggest that corporate irresponsible events often do not significantly alter reputations and a firm’s standing is relatively stable. Stakeholders tend to view scandals through the lens of their existing perceptions and often dismiss events that contradict their views.

This may be concerning to some, as it suggests companies will attract few social sanctions for any transgressions, thereby undermining what is often thought to be an important means by which organisations are discouraged from behaving irresponsibly.

On the other hand, it also highlights how resilient a company’s standing can be, and therefore, the value of investing in gaining a positive reputation in the first place. People will often look the other way if a ‘socially responsible’ company does something questionable. Endless accusations of tax avoidance have not harmed the reputation of Google (now Alphabet) – a staple fixture in Fortune’s most admired top 10. However, if it’s a business people already dislike embroiled in scandal, they see it, to a large extent, as merely confirming what they already thought.

It is worth noting that our research looked at the perceptions of financial analysts, corporate executives and others surveyed by Fortune. Further research is needed to find out if these results are equally true for other groups, such as employees or customers.  

But it seems Buffett's favourite maxim may need updating – a reputation is not always ruined by a corporate scandal.

Further reading:

Nardella, G., Brammer, S. and Surdu, I. (2020) "Shame on who? The effects of corporate irresponsibility and social performance on organizational reputation", British Journal of Management, 31, 1, 5-23.

Irina Surdu-Nardella is Associate Professor of International Business & Strategy and teaches Strategic Advantage on the Distance Learning MBA, Executive MBA and Executive MBA (London). She also lectures on International Business Strategy on the MSc International Business and Global Challenges in Management & Sustainability on the MSc Marketing & Strategy.

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