History is littered with infamous corporate scandals, from Enron’s deceptive accounting techniques in 2001 to the Volkswagen emissions scandal of 2015.
As Warren Buffett once opined, “it takes years to build up a reputation, while it takes minutes to destroy it”, with Enron one of a number of firms that failed to recover from the stigma of individual scandals.
More than ever, companies and their leaders are being held and accountable for their actions in the corporate realm, but what are the best ways to prevent becoming embroiled in scandals? Let’s find out.
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The Impact of Scandals on Brand Image
There’s no doubt that reputation and brand image remain critically important in the digital age, with nearly three out of every four customers more likely to trust a company if it has positive reviews.
Even on a fundamental level, it’s estimated that between 70% and 80% of the economy’s market value is derived from intangible assets such as brand equity and goodwill, so it makes perfect sense that scandals can have a highly detrimental impact on a company’s reputation.
Of course, the reputation of a business is fundamental to its survival (especially in a crowded and competitive marketplace), both from a short and a long-term perspective.
For example, scandals such as those experienced by Enron and Volkswagen incurred significant and ongoing legal cases, which generated huge legal costs and placed a genuine strain on finances, energy and human resources.
This also translates into a sustained and negative impact on a firm’s bottom line, as profit margins are squeezed by increased operational costs and any subsequent loss in earnings. Certainly, consumers are less likely to trust businesses that have been accused or convicted of fraudulent offenses, especially when you consider that customers are increasingly mistrustful of sponsored messaging and advertising.
Even on a fundamental level, scandals can sever the relationships between a brand and its most loyal patrons, particularly when viable and more trustworthy competitors exist in the marketplace.
How to Avoid a Corporate Scandal
The question that remains, of course, is how can businesses actively avoid becoming embroiled in scandals in the first place? Here are some key points to keep in mind:
#1. Sell Truthfully:
Let’s start with the basics; as it’s crucial that you sell your products or services truthfully and in a way that creates transparency between you and your customers. This not only ensures that you comply with advertising standards, but it also negates the need for the type of product recalls or controversies that can prove disastrous for even established brands.
#2. Liaise With an Established Legal Team:
In instances where your brand is impacted by negative press or finds itself engulfed in a scandal, there’s always a pressing need to be proactive in your approach and liaise with an expert legal team to manage the fall-out. If you extend this logic further, you could even scale to employ an in-house legal team over time, enabling you to create more robust legal protections and minimizing the risk of becoming embroiled in a scandal.
#3. Be Transparent About Your Decisions:
We’ve already touched on the importance of transparency, with this crucial to both internal and external decision-making processes. For example, Aramark Corporation (a food brand) faced a raft of employee lawsuits after failing to pay out predetermined performance-based bonuses to its various managers, causing some to lose up to 20% of their expected annual compensation. This resulted in a $21 million settlement and a highly publicized legal process that undermined the brand’s image and reputation.