The Scandal Effect
In September 2015 Volkswagen was found to have intentionally set controls on its diesel engines to misrepresent their emissions levels. Some 11 million cars worldwide had the “defeat” program installed.
This discovery led to an immediate plunge in Volkswagen’s stock price; government investigations in North America, Europe, and Asia; the resignation of its CEO and the suspension of other executives; the company’s record loss in 2015; and a tab estimated at more than $19 billion to rectify the issues. The scandal did incalculable damage to Volkswagen’s brand. Imagine that you are an engineer in Mexico, or an HR executive in the United States, or a logistics expert in Poland. You worked for Volkswagen from 2004 to 2008, before the new emissions controls were even in place, and you never worked in the divisions that created the deceptive programming. Lately you’ve been unhappy in your current job and have been thinking about making a change. Your long-ago association with VW shouldn’t be a problem—right?
Wrong. Our research shows that executives with scandal-tainted companies on their résumés pay a penalty on the job market, even if they clearly had nothing to do with the trouble. Overall, these executives are paid nearly 4% less than their peers. Given that initial compensation in a job strongly affects future compensation, the difference can become truly significant over a career.
About the Research
Using proprietary data from a global executive placement firm, along with detailed career histories, we analyzed 2,034 executive job moves across multiple functions, industries, seniority levels, and geographies from 2004 to 2011. For each move, we captured geography, position title, industry, company names, individual attributes such as gender and education, and compensation levels from both prior and placed positions. Nearly half the placements were for positions other than C-level, president, or vice president.
Prior and placed jobs had a mean total compensation of $294,000 and $331,000, respectively. On average, the executives had almost 19 years of professional experience. Of the placed executives, 18% were women (a notably higher proportion than in data sets relying exclusively on C-level executives).
Of the executives studied, 18% had worked at a company marked by earnings misstatements captured in either the GAO database or the AAER database. The GAO database captures only restatements, and the AAER database captures SEC enforcement actions that have been flagged with an AAER designation. The employment of these executives clearly predated any misdeeds, and they were never legally implicated in a scandal.
We measured the impact on first-year total compensation when an executive with a scandal firm on his or her résumé was placed by an executive search firm. Each executive was benchmarked on past-year compensation at the prior company.
Interviews with senior leaders at international executive search firms complemented our quantitative analysis and corroborated our findings. One European headhunter recounted the difficulty of placing an executive who had once worked for a bank that had recently experienced a scandal, although the executive had left the company a decade before the trouble even started. The headhunter’s client, a managing director, resisted meeting the candidate for some time. “It’s too risky,” he finally said. “Even though the guy has been out of the bank for 10 years, I cannot consider him for this search.”
A surprisingly high proportion of professionals are vulnerable to this kind of bias. In our sample of job changers, 18% of the executives had worked for a company that had been involved in a financial scandal. Of course, if companies involved in nonfinancial scandals—product-safety issues, labor disputes, customer-relations fiascos, and so forth—were included, the proportion would be even higher. Because the scandal effect is lasting, 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.
The business press illuminates the variety of scandals that can affect an organization’s reputation: Fortune listed the five biggest scandals of 2015 as Volkswagen’s, the FBI’s indictment of FIFA, Toshiba’s accounting problems, Valeant’s secret relationship with the pharmacy company Philidor, and the arrest of Turing Pharmaceuticals CEO Martin Shkreli (already excoriated in the media for price-gouging) for stock fraud. Inc., too, published a list, which included Goldman Sachs’s use of confidential information; indictments of nine New York City energy companies for corruption; the hack of VTech, which exposed its insecure data; and the revelation that Exxon Mobil “deliberately misleads the public about climate change.”
For the purposes of our study, we defined “scandal firms” as companies that had been cited in the databases of the U.S. Government Accountability Office (GAO) or the U.S. Securities and Exchange Commission’s Accounting and Auditing Enforcement Releases (AAER) for misstating earnings. Over the past few years the absolute number of companies that filed restatements has held steady at about 800 to 850. However, the size of those companies has increased, which means that more employees are vulnerable to the scandal effect.
The modern concept of stigma is most closely associated with the sociologist Erving Goffman, who in 1963 defined it as “the phenomenon whereby an individual with an attribute which is deeply discredited by his/her society is rejected as a result of the attribute.” A stigma, which may be fair or unfair, undermines a person’s credibility in the social role he or she is attempting to play. You might not think ill of your real estate agent if you discovered that she was a semiprofessional poker player in her spare time, but the same discovery about your child’s Sunday school teacher could be disconcerting.
Even a company you left long ago can
have an impact on your job mobility.
The dynamics of stigma are robust across diverse circumstances: The “what” may change, but the “how” is constant. A stigmatized person—and frequently his family and associates as well—is isolated, avoided, demeaned, or not taken seriously in his chosen role. If someone is stigmatized for an ethically neutral, uncontrollable, or irrelevant attribute (think of race, gender, or physical disability), we see the marginalization as unjust. But when the attribute is perceived as both controllable and immoral, it becomes socially acceptable to discriminate against the stigmatized.
To understand how a corporate scandal can hurt an individual’s career, we turned to the concept of organizational stigma, which occurs when a company’s actions are widely seen as fundamentally flawed or immoral. Researchers have become increasingly interested in organizational stigma since the financial collapse of 2008. An entire industry may be stigmatized by society at large for its core functions—think of sex work, weapons manufacturing, or tobacco production, for example. People who choose to work in such industries are aware of the risks, unlike the executives in our study. Noncontroversial companies don’t incur organizational stigma merely because of missteps or failure—there must be a sense that they actively engaged in wrongdoing, transgressing important norms and values of their industry.
Companies that are tainted by scandal suffer from stigma the same way individuals do. Other organizations may sever relationships with them or try to take financial advantage of the situation. Stigmatized companies may be mocked in the media, have their charitable donations rejected, see employee morale plunge, and experience an exodus of talent. And organizational stigma is contagious, not only for employees but sometimes even for other companies in the same industry that have done no wrong.
Why is stigma so sticky—so hard to shake and so easily transferred among people and groups? Here are three reasons:
Stigma isn’t always rational.
Social scientists generally agree that the stigmatization process is a product of evolution. Bos et al. (2013) have described it as primarily about “keeping people down…keeping people in [and]…keeping people out.” In other words, stigma serves to maintain status hierarchies, enforce norms and values within a community, and help people avoid contact with contaminated others—aims that are actually similar on an emotional level. Infectiousness, moral wrongdoing, and unacceptable “otherness” are linked in the human mind to disgust.
Indeed, experimental psychology offers voluminous evidence that our judgment of other people, and even of physical objects, is often based less on rational assessment than on a kind of magical thinking that seeks to avoid moral or physical contagion. People photographed with undesirable others are often themselves judged less desirable—a kind of guilt by association. And research subjects were less likely to want drinks that had been stirred with a brand-new comb, or a sweater that was once the property of a serial killer.
Judging other people accurately is hard.
Another reason organizational stigma can adversely affect innocent individuals is that accurately assessing someone you do not know is very difficult. Hiring managers often use cognitive shortcuts, heuristics, and stereotypes—consciously or unconsciously—to assess candidates. Negative information and stereotypes have disproportionate influence.
A hiring manager can attempt the laborious process of first assessing a candidate’s traits and skills and then discerning how they relate to the accomplishments listed on his résumé. Alternatively, she can construct a patchwork approximation of his character by consulting her knowledge of all the institutions he has been affiliated with. The latter approach—creating a mental model of an unknown quantity using various known quantities on the résumé—is easier, almost automatic. “The image of the company is stronger than the individual image,” as one recruiter put it.
Thus it’s not surprising that hiring managers often evaluate candidates according to their former affiliations—whether consciously or not. One headhunter told us about a client, the CEO of a big bank, who declared that he wouldn’t even interview any candidates from two particular banks that had failed. The CEO didn’t care that several candidates from one of those banks claimed they hadn’t been able to do their jobs because the boss was such a tyrant. In the CEO’s view, the headhunter said, somebody with integrity who was unable to do his job would have voted with his feet. We’ve heard plenty of similar anecdotes.
There are motives to be conservative.
Organizational stigma results from the judgments of multiple groups, whom researchers have dubbed “arbiters.” Legal arbiters are regulatory agencies and court systems; social arbiters, or opinion makers, include academics, journalists, and advocacy groups; and economic arbiters are the business community, including executive search firms and companies that are hiring. These groups are responsible for investigating and explicating corporate scandals and for imposing and addressing their consequences.
The complicated nature of most corporate scandals makes arbiters’ tasks inherently difficult. Furthermore, each group of arbiters is concerned not only with the objective truth of the situation but also with the kind of evidence and narrative its audience will accept. Lawyers must make arguments that juries can understand; reporters must write stories that readers will find plausible; businesses must make decisions that customers and shareholders will consider reasonable. If the truth is too complicated, it may not be acted on. Some headhunters reported being unable to “sell” candidates from scandal firms because they could not craft a compelling narrative for their clients. After a few such incidents, many decide that it is not worth the investment of energy—even if they believe the candidate is innocent and qualified. And because their own credibility is at stake, arbiters are naturally motivated to be conservative. Defending the stigmatized can lead to being stigmatized oneself.
Given these cognitive, emotional, and market considerations, it is a wonder that any executives from scandal firms manage to find subsequent employment. What helps them bounce back?
Different Factors, Different Effects
Multiple considerations determine whether, and how much, a corporate scandal will affect the career of an innocent employee or former employee.
We found that scandal penalties are more pronounced in countries with stronger regulatory and governance systems, such as the United States and Denmark, where executives with scandal firms on their résumés receive compensation more than 6% lower than that of other executives (holding past compensation levels constant across executives). In countries that have weaker laws, such as Russia, Spain, Colombia, and Bahrain, differences in compensation are not statistically distinguishable. Countries with strong laws have regulatory enforcement mechanisms, well-developed accounting and auditing systems, sturdy corporate governance systems, and intermediaries that allow information to be disseminated efficiently. These factors indicate that a country has both the capacity to discover and punish crime and the motivation and desire to do so.
A country’s size may play a role as well. In a smaller nation, people in the same industry are more likely to know one another, so the truth about a corporate scandal—who is innocent and who’s not—may be easier to uncover. In a country as large as India or the United States, the news of a scandal spreads instantly, but personal knowledge of the individuals involved is less likely.
Damages from financial scandals are of course most sharply pronounced among those in finance-related careers: Executives formerly at scandal firms receive initial compensation almost 10% lower than that of other finance executives, and the gap widens over time. For example, if a finance expert with a scandal on her résumé finds a position at a new company that ordinarily pays, say, $200,000, and her compensation grows by 3% each year for the next 20 years, her first year’s pay will be reduced by $20,000 (10%), and over those two decades her lost compensation will amount to almost $540,000.
The burden of previous association with a scandal-tainted company may be greater for those in senior positions, whose compensation is more than 6.5 % lower than that of executives with no such association. Effects are mixed for junior executives, some of whom manage to escape any negative impact. “The higher up you go in the leadership structure or the power structure at large, the more people are permanently punished for their affiliation,” says one recruiter. “At the board level, people are so occupied by the optics that the substance no longer matters. They just steer clear of any taint whatsoever.”
Women are hurt more by the scandal effect than men are: They receive 7% less in compensation, whereas men receive only 3% less. The greater visibility of female leaders may account for this: It’s easier for a company to hire a reputationally challenged worker who will remain in the back office than one who will be high profile. And women from scandal firms, especially those in a male-dominated industry, may feel that they approach the negotiating table with two strikes against them and thus don’t push on compensation as hard as they otherwise might, or as their similarly stigmatized male peers do.
Women are hurt more by
the scandal effect than men are.
An elite education appears to protect against the scandal effect. Alumni of scandal firms who were also alumni of Ivy League schools received offers moderately lower (2.0%) than did peers without scandal firms on their résumés, whereas non-Ivy graduates were offered almost 4% less.
Executive search consultants suggest that the following factors may also be in play:
Some industries are more lenient about what is deserving of organizational stigma. Bankruptcy may destroy the reputation of a financial institution but not of a software company, at least not in the 21st century. When an entire industry has been hit with multiple scandals or failures, as banking was, the reaction of the companies that survive may be mixed. One interviewee noted that nonstigmatized firms may be more risk-averse in protecting their reputations: “Even the people who maybe weren’t entirely clean or pure don’t want to touch anyone who’s unclean or impure, because they don’t want to borrow anyone else’s problems or inherit anybody else’s scandal.” Another recruiter, however, argued that the banking industry has become more tolerant: “People are generally open-minded. It may partly be because we get a lot more of this in financial services than anywhere, given the financial crisis. But at this point I think there’s a feeling that it’s happened to everyone.”
Some industries are more lenient about
what is deserving of stigma.
Also, industries or niches within them may have different standards regarding risk and their response to stigma. For example, “the private equity guys are more forgiving than anyone else,” according to one recruiter. “What they care about is how good a person is at his job, how much he really gets done. They will go deep, deep, deep to understand the particulars of what that person did versus what the institution did, the inside politics of it.” Remember that stigma involves being put outside the dominant value system. If an industry’s value system stresses the presumption of innocence, nonconformist thinking, and independent empirical research, the unfairly stigmatized may benefit.
Subgroups within the stigmatized company.
Some organizations function—and are perceived—as a more unified whole than others. But if a scandal is clearly the product of one person, group, or company division, it may be easier for employees elsewhere in the organization to escape the stigma. As one search consultant noted, “Enron U.S. and Enron Europe were two very different situations. There were no issues, as far as I remember, with the European operation. Those executives actually continue to have very strong careers, because Enron in Europe was seen as very innovative at the time when the energy markets were being deregulated.”
Joining a “Scandal Firm”
When stigmatized companies hire managers, the balance of power shifts to the individual. Those who seek to join a company that has weathered a scandal may get a premium for doing so. “When scandal firms survive,” one headhunter told us, “the people who move into them are compensated more positively than those who were there before.”
However, compensation is a blunt instrument, and search consultants are likely to look for candidates whose skills or experience make them a good fit for those particular circumstances. “Companies that have been through some kind of negative publicity absolutely have to exercise a little danger pay,” one recruiter acknowledged, “although it’s not just ‘Hey, you’ve got to pay out 40% more.’ Say that I knew John Doe lived in Europe before, and his family really wanted to move back; we could use that to our advantage.”
One recruiter noted that taking a job with a scandal firm could be a worthwhile move for an early- or late-career leader—that is, a short-termer with a high level of risk tolerance: “Some very aggressive, talented young people might take a job like that because they want a chance to be CEO—if it works well, they look great, and if it doesn’t, it’s not their fault, so they can probably recover—or, more likely, somebody in the late stage of a career or whose company got sold, so there’s not much personal risk.”
Some job candidates may be attracted by the challenge of managing a turnaround. One recruiter spoke of the “mixture of ego and humility” that would lead an executive to join a scandal firm: “It’s an acknowledgment of the extent of the problem and the need to do due diligence far beyond what you would normally do if you were accepting a role. And it’s a willingness by [the hiring company] to open itself up so that the full extent of the issue can be resolved. If you’re the person who does it, you are marked as special. How wonderful would it be if you were the person who saved Lehman Brothers?”
We see a similar phenomenon in the Michael Milken–Drexel Burnham Lambert scandal. Milken was indicted on 98 counts of fraud and racketeering in 1989, and Drexel filed for bankruptcy in early 1990. The functional and geographic division of the firm into Drexel West (California, where Milken and his junk-bond department were located) and Drexel East (New York, home of the equities department) helped the New Yorkers survive with their careers intact. “In Drexel East, the research department was not just highly regarded on the Street,” recalls the analyst Abby Joseph Cohen. “It was a group of people who were reasonably well liked and individually credible.” Geography, function, and leadership can all contribute to the existence of separate subcultures within a firm.
Drexel analysts did well after the bankruptcy in part because some of them had specialized skills or a narrow professional focus. Such people may be protected after a scandal. As one headhunter put it, “I find that in narrow industry niches where people deeply know their competitors, there’s a lot of fact-finding around the individual. And in those cases the individual can transcend the larger misfortunes of the firm.”
Niche specialists have two major advantages: They are not easily replaced, and—more important—they are likely to be known personally by potential hiring managers. “In certain niches individual reputation is more important than public opinion,” one recruiter explained, “because these people would never necessarily move out of their own sector, and so would not be confronted with a layman’s view of what happened.” Indeed, that’s how things played out for specialists at one failed investment bank. The bank was known for playing fast and loose and for tacitly encouraging misbehavior. But “there was a lot of recognition of the talent inside,” says one recruiter. “And a lot of that talent, because of the way that firm was structured, was very specialist-oriented. People would work in the same niche their entire careers. That talent got snapped up in an instant. I would say almost no taint adhered to the technical experts in their specialty fields.”
The eye of the beholder.
Misstating earnings (the type of scandal we examined in our study) represents a profound breach of public trust, confirmed by the legal system and clearly defined. But beyond such clear-cut examples, the extent of organizational stigma also depends on which stakeholder group is affected. For example, Walmart and Amazon are stigmatized by some groups for their labor and other business practices, yet are popular with shareholders and customers. A recent and fascinating case is that of Blue Bell Creameries, whose ice cream was recalled in 2015 after a listeria outbreak led to three deaths. Despite allegations that the company had known about the food-safety issues for years, many customers remained intensely loyal to the product. Given that the desire to avoid illness is a fundamental psychological reason for stigmatization, the loyalty of Blue Bell’s customer base suggests that we still have much to learn about how organizations do or do not become stigmatized.
How can you survive a corporate scandal? Insights from our field research suggest three steps:
Truth is the best friend of the innocent. Transparency and full disclosure are key to surviving after a corporate scandal. Recruiters were quick to tell us that employees from a scandal firm need to be the ones to bring the topic up. “I’d definitely opt for addressing it head-on, both to headhunters and to anybody they’re meeting in an interview context,” said one.
Recruiters generally do additional due diligence on candidates from scandal firms. “We would do a standard 360-degree reference process, but we would probably want to talk to a few more people than normal,” said one. “In an average search, we talk to five to eight references. Maybe we have to do eight to 10 references to cover people from a scandal company. If I’m the client, I may want to talk to some of those references directly. On top of that I would certainly recommend a third-party background check as well as the standard criminal background check.”
Because they understand their clients’ concerns, executive recruiters can help candidates create a full, clear, and succinct narrative for hiring managers. A headhunter who recruited the CFO of a scandal firm to another financial institution described the process: “The candidate spent a lot of time helping me understand and articulate that the parts of the world over which he had responsibility were not the parts of the world that were blowing up on the company’s balance sheet.”
According to Goffman, stigma functions as a kind of reputational bankruptcy, in which the actual self cannot make good on the implicit promises of the virtual self. The best course of action for an executive stigmatized by scandal is to borrow, as it were, reputation and legitimacy from someone else. Managers who have extensive external networks, or who are in fields that emphasize individual reputations, may be able to acquire such cover through existing relationships.
For many others, executive search firms can serve as both the reference and the sponsor. Indeed, the importance of the research that these firms perform lies not only in the exonerating information but also in the time and energy that gathering such information represents. Search firms are hired by companies, not by job seekers, and will not invest in an in-depth background check unless they already believe in the candidate’s innocence and value on the job market. Their investigations provide a form of reputational voucher.
After proving your innocence and establishing relationships with people who can attest to your character, the final step may be to take a “rehab job.” One headhunter noted that although some executives—especially those with a dedicated recruiter and an “enlightened” hiring firm—can make a job change at the same level of responsibility and compensation, many candidates from stigmatized companies need to “seek a lower-level job which you can do with one arm tied behind your back.” He continued, “You look so compelling compared with the next person who might do it that you’re almost guaranteed to get the job. Inevitably it’s at a lower level of compensation.”
The purpose of the rehab job, whether or not it represents a step backward in compensation or responsibility, is to create a persuasive story to compete with the scandal narrative. Your eventual goal is to make the rehab job the first piece of data people associate with you.
One recruiter told us about a banker whose employer had been caught in a fraud; the banker managed to find a rehab position at a smaller institution and eventually became its leader. “It was an opportunity for him to get back into a bigger role with a smaller company in a market where he still had a good reputation,” the recruiter recalled. “Later, we recruited him to be a chief executive. We went through all our due diligence on his background, as did some of the board members, to make sure that not only was there no culpability, but there was no sort of lingering reputational damage—which there was not. I think he needed that in-between job. I don’t think you could’ve taken him right out of where he was and plugged him in to be CEO somewhere else.”
The tactics for surviving an organizational scandal depend on multiple factors: what phase of your career you’re in, your skill set, the industry, the overall labor economy, how willing you are to make changes. But the basic strategy is the same: Get the facts on the table, borrow someone else’s good name, and take a job that will allow you to prove yourself again. The scandal effect can’t always be predicted or controlled, but it can be survived.
A version of this article appeared in the September 2016 issue (pp.90–98) of Harvard Business Review.
Boris Groysberg is a professor of business administration at Harvard Business School and the coauthor, with Michael Slind, of Talk, Inc. (Harvard Business Review Press, 2012). His work examines how a firm can be systematic in achieving a sustainable competitive advantage by leveraging its talent at all levels of the organization. Follow him on Twitter @bgroysberg.
Eric Lin is an assistant professor in the Department of Behavioral Sciences and Leadership, United States Military Academy.
George Serafeim is the Jakurski Family Associate Professor of Business Administration at Harvard Business School. Follow him on Twitter @georgeserafeim.
Robin Abrahams is a research associate at Harvard Business School.