Company Scandals: Effects On Employees
Abstract
The purpose of this study is to determine how wrongdoings committed by the higher ups in a company impact the employees. I infer that unless legal action is involved, the monetary situation of higher ups are rarely, if ever, harmed as they opt for wage cuts and terminating sections of workforce in order to preserve the wealth of the higher ups. This research is being conducted in order to discover if the employees of a company take the brunt of the impact for the company, through means such as wage cuts or job terminations, further look into how scandals affect a company, and change the way the general public handles the information when a company scandal is exposed if the hypothesis proves to be correct. In order to conduct this research, average employee wages and layoffs from before and after the scandal, as well as interviewing those who were fired or worked at the company during the time of the scandal and seeing if the way they were treated has changed.
Introduction
Companies, both willingly and unwillingly, are being thrust into the public eye due to the increased prevalence of social media. This is a double edged sword; companies can reach a wider audience at the cost of being broadcast and denounced publicly due to a single misstep causing scandal. When such negative public relations incidents occur, the initial media coverage target administration errors who allowed the wrongdoing to take place, through social, monetary, or, legal avenues. However, statistics on the way these scandals directly affect a company is limited, and the study I am conducting seeks to close the information gap in this area. Specifically, I am going to look into how the scandals directly affect the employees whose only relation to the scandal is being part of the same company. It is likely that those who are to blame for a scandal lighten the burden by allowing employees to take the majority of the damage, at least monetarily, thus allowing the higher ups to preserve their own wealth. In cases where there are no legal repercussions, this shifting of responsibility can remove one of the two to three major responsibilities companies face when a scandal comes to light, and allow those who were in the wrong off the hook for the crime or wrongdoing they commited. I will limit my study to the US as it is one of the most, if not the most, prevalent market economy in the world, thus the extent that higher ups may go to avoid repercussions can be seen much better. Key terms that will be referenced throughout the paper include: outrage marketing, the idea that companies intentionally cause scandals in order to get more people talking about them and increase sales in the long run, Alva and The Harris Poll, two companies that do research into corporate reputation, reputation quotient (RQ), a measurement of corporate reputation used by The Harris Poll, outrage culture, referring to how people get furious over the smallest of company mistakes, press release (PR), refers to information or ideas being spread about a company,
Literature Review
With the rise of scandals or outrages over company actions, many have been using the term outrage marketing, believing that companies must intentionally be using scandals to get free PR for the company, and in the long term get more sales. However, few ever showed hard facts over whether or not this is a viable tactic for companies to employ. In turn, I began researching into how scandals affected three different companies, United Airlines, H&M, and Volkswagen, in order to see if outrage marketing is a valuable tactic at all.
Literature Review: United Airlines Monetary Effects
As detailed by Ronan Shield’s article, the United Airlines incident involving the doctor, David Dao, should have been a huge disaster for the company as a whole. The flight had forcibly removed the doctor on his way to see patients due to the flight being overbooked. This forceful removal lead to the doctor leaving the airplane with many injuries, including a concussion, a broken nose, and two broken teeth, the video of this incident quickly gained popularity. The effects on the company, on the other hand, were underwhelming. Starting with the monetary effects of the scandal, by taking a look at the during the month of the incident initially coming out we can see that from April 7th 2018 to April 28th 2018, the stock dropped from 70. 88 USD to 69. 56 USD. Aside from the settlement fee with David Dao which is unknown to the general public, United Airlines lost little to no money at all. In fact, it is likely United Airline gained money in the long term. From an article in the New York Times, that came out shortly after the incident, “United reported a profit of $818 million in the most recent quarter ending in June, up 39 percent compared with last year. Sales rose, too, as more customers booked flights with the carrier, amid rising demand for air service over all. ” (Maidenburg). These statistics may lend credence to the idea of outrage marketing, however Kort’s article on consolidation provides reasons to believe otherwise. The practice of airline consolidation in the United States has lead to three quarters of the air travel being controlled by four companies, and United Airlines is one of these four. Many routes being monopolized by one of the airplane companies, United Airlines lack of competition in the industry shows that many people have no choice but to fly United Airlines, unless they wish to pay more money for a longer flight with a different company. This positive financial effect is still surprising, as when compared to public reputation effects, it still makes little sense.
Literature Review: United Airlines Social and Legal Effects
Social effects wise, United Airlines did not fare nearly as well as they did from the financial effects. Negative perceptions of United Airlines' corporate reputation increased 500 percent following the April 9 passenger incident…”(“Harris Poll: United Airlines’ Corporate Reputation Takes A Nose Dive”). The Harris Poll article shows how much the incident angered people. After the video of the incident of the video was first shared, the topic quickly became one of the most trending topics on twitter, and many celebrities, such as Jimmy Kimmel on his show and airline competitors like American Airlines, began speaking out and shaming United Airlines over the issue. With public approval being down as much as it was according to research, and with United Airlines taking center stage on twitter for the incident, United wished to show the way they planned on changing. Internal changes wise, United Airlines released a ten commitments in order to improve customer experience and ensure that the incident with David Dao would not happen again. These commitments include, “Not require customers seated on the plane to give up their seat involuntarily unless safety or security is at risk. ,” as well as limiting the use of law enforcement to security and safety matters only (“United Airlines Announces Changes To Improve Customer Experience”). United Airlines also got away with almost no legal effects, aside from the undisclosed settlement with David Dao, the passenger forced off the airplane.
Literature Review: Volkswagen Monetary Effects
The United Airlines scandal may have made it seem like public outrage over an incident, especially one as horrible as the forceful passenger removal, barely affects a company. Nonetheless, the Volkswagen emissions scandal directly juxtaposes that idea, and shows how badly a scandal can affect a company. The Volkswagen was a company known for high performance, environmental friendly, and fuel efficient vehicles. The vehicles were of such high quality that the environmental advocacy group decided to run their own tests on the vehicles to try and convince other companies to follow in their footsteps. Instead, the group found that the vehicles were emitting as much as 40 times the amount of emissions allowed by the U. S. Environmental Protection Agency (Jordans). Jordan’s article also explains that the change in emissions was due to a system that allowed the car to release less emissions during smog tests, and allows the release of more emissions on the road so drivers can make use of more engine power. Monetarily, Volkswagen was hit severely. Stock price wise, they faced a colossal drop from 187. 99 USD a few days before the scandal came to light, to 106. 86 USD a month into the scandal. To better understand these values, within a week of the scandal, the company lost roughly 17. 6 billion USD in market value (“Volkswagen AG shares plummet after admitting it cheated on emission tests”). Outside of raw market value, Volkswagen had to face many outside costs, such as 7. 3 Billion USD in order to cover initial costs from the scandal. All of these costs do not include legal costs that will be covered in a later section. These results show three things. First of all, both the United Airlines and Volkswagen scandals only have one key difference which lead to the difference in outcomes. United Airlines had little to no competition in their field, as opposed to Volkswagen who has to compete with the many other car developers. The second result of this outcome shows how damaging a scandal can be, as to this day Volkswagen has not recovered, and finally it removes credibility from the idea of outrage marketing, as outrages over incidents can be incredibly damaging, as seen in this case.
Literature Review: Volkswagen Social Effects
As mentioned previously, Volkswagen was once well known for clean, efficient, and powerful vehicles. This reputation was heavily damaged after the scandal came out. Alva researchers found that Volkswagen’s reputation nearly plummeted after the scandal came out. “. . . [Volkswagen's reputation] which had been healthily consistent at an above sector average +80 – dropped by an average of 67% post the emissions scandal. Furthermore, negative recommendations increased by nearly 2000%. ” (“What is the Reputation Damage of VW’s Emissions Admission?”). Alva also discovered that on average, 1000 people everyday, at the time of the study, are attempting dissuade people from buying from Volkswagen through negative reviews of the company. The Harris Poll found that the overall RQ score of Volkswagen, post emissions scandal fell from a very good score of 75. 21 to a very poor score of 54. 75 post scandal. Specifically, the company took the biggest hits in the Emotional Appeal section, which details trust and respect consumers hold for a company, and the Social Responsibility section, which includes environmental responsibility. Overall, the company took heavy hits to its reputation and lost trust and respect from many of their customers due to the scandal.
Literature Review: Volkswagen Legal Effects
Of the three scandals I analyzed, Volkswagen was the only company to receive heavy legal repercussions due to the scandal. Before getting into direct legal repercussions, there were many internal changes that came about as a result of this incident. The former CEO of the company, Martin Winterkorn, was forced to resign, and Michael Horn, the CEO of the US branch of the company, also resigned, though he did cite the exit as a mutual agreement with company, but the exact reason is unclear (Neate). The legal repercussions get much worse for the company, however. Monetarily, the company was charged 25 billion USD for the whole scandal in the USA alone (Parloff), as well as a 4. 3 billion USD settlement in civil and criminal lawsuits (Shepardson). Finally, at least for fines, the only major fine outside of the USA was the fine dealt out in Europe, more specifically Germany, a 1. 18 billion USD fine over the scandal. Outside of fines, many higher ups in the company face charges. The supposed mastermind behind the incident, former CEO Martin Winterkorn faced four charges, wire fraud, conspiracy to defraud the United States, violation of the Clean Air Act, and conspiring to cover up the scandal (Shepardson, Taylor). Aside from the ex-CEO, six other higher ups, including the former head of development for Volkswagen Brand Heinz-Jakob Neusser, two former heads of engine development Jens Hadler and Richard Dorenkamp, as well as Oliver Schmidt who was the former manager of environmental and engineering office in Miami, were all charged with a 10 year conspiracy to cheat U. S. emission tests, as well as cover up the excess emissions (Shepardson).
Literature Review: H&M Monetary Effects
It is arguable the past two case studies are poor examples of outrage culture, as the incidents were either originally covered up, like in the emissions scandal, or would be hard to plan out, such as the passenger removal scandal. These points are fair, and thus the final scandal I decided to research into was the H&M hoodie scandal, a far more tame scandal compared to the other two. The hoodie scandal is simple in nature, the sight posted a picture of a black child wearing a hoodie labelled “Coolest Monkey in the Jungle. ” This image was deemed racist due to the implication of a black child being referred to as a monkey, and the accusations of racism quickly gained popularity. Like with the United Airlines scandal, the H&M hoodie scandal showed little effect in stock price, going from 18. 22 USD from before the scandal came out, to 17. 93 USD post scandal. There were also little to no long term effects of the scandal and the stock price has remained consistent. The only real monetary damage came from protestors destroying stores and merchandise out of anger at the company, and the amount this costed the company was never disclosed (Vomerio). The lack of monetary effect in this case comes from the fact that many saw nothing wrong with ad, and believed there was no racial intent involved.
Literature Review: H&M Social Effects
Unlike with the monetary effects, H&M faced massive repercussions socially. H&M is a much smaller company, and thus there is no credible concrete data on public approval, the company took center stage on social media during this time. Many people commented on the issue, both defending and attack H&M over the incident. For the most part, celebrities attacked H&M over the incident however. The Weeknd and G-Eazy, for example dropped partnerships with the company, and celebrities like Diddy, King James, and Chris Classic called the company out through Instagram posts (Lubitz). There we no legal charges in this scandal at all.
Literature Review: Overall
Overall, the case studies all show different ways a scandal can affect a company. United Airlines provides credence to the idea of outrage marketing, while the H&M and Volkswagen controversies strongly dissuade this strategy. H&M had the shortest section, and was likely the best example at an attempt of outrage marketing. The issue in question was controversial in the sense that there were multiple takes on the issue, was not outright illegal, yet did not lead to any long term benefits for the company. Volkswagen was an overall huge disaster for the company, and the company still is trying to comeback from it to this day, and United Airlines might have been affected just as bad as Volkswagen had it not been for airline consolidation. More information still would prove to be useful, and knowing information like if the majority of the cost was diverted onto the employees, then the true damage the higher ups in Volkswagen, for example, were facing would be much clearer.
Methodology
In order to determine how scandals affect the employees of a company, information directly from the company will be helpful but are not necessary. It would be helpful, and speed the process up if I were able to find out average wages before and after the scandals, as well as how many people were laid off on average before and after the scandals. I would also look to find and survey as many people who may have been fired, received wage cuts, or still worked unaffected at the company during the time of scandal, and ask them if they had seen any irregularities during the time of incident. The surveys would allow me to collect more accurate numbers of those who were fired, and see if there were any specific distinctions between those who were laid off and those who were not, as well as see if the employees were treated differently during the scandal. It would also be important to look into the annual reports of each company, and see if there are any massive differences in the number of employees during the years the scandal may take place. Snowball sampling combined with voluntary sampling would likely give me the best results.
Those who worked or work at a company during a scandal can volunteer to answer, and then would be asked to spread the study to those who they know that also worked or were terminated during the time of the scandal at the company. The number of respondents I would like depend on company size, for smaller companies like H&M, anywhere from 3 to 4 thousand response would be plenty, whereas for larger companies like Volkswagen a larger sample size, anywhere from 100 thousand to 200 thousand would be needed to make sure the information is accurate. Finally, the survey itself would take the form of a 15 to 20 question survey, something that can capture many aspects of their work, but nothing that would take too long to increase likeliness of receiving a response. The study would be divided into three parts for each company, and each part would take no longer than 4 or 5 months, as by then everyone who wishes to answer it likely has answered the survey.
Dissemination
The research would be shared through the release of the research to the general public, as well as making use of publications. If the hypothesis proves to be correct, it would be important make sure the general public hears the research, as they are the ones who will hopefully change the way they handle information on scandals. Thus publications on popular news articles that people on all sides of the political spectrum people read, like CNN, BBC, WSJ, NYT, and FOX news for example, ensuring as many people of the american public get access to the information as possible.
