key: cord-0048561-x9v2re54
authors: Gilles, Grolleau; Alain, Marciano; Naoufel, Mzoughi
title: Scandals: A ‘reset button’ to drive change?
date: 2020-08-09
journal: Organ Dyn
DOI: 10.1016/j.orgdyn.2020.100783
sha: b6886be968562ea4e1d8b661899fcd6a897f617f
doc_id: 48561
cord_uid: x9v2re54

nan

Scandals are frequent in various domains -business, politics, sport, education, and so on. While they are obviously more striking when involving large and well-known companies, such as, Wells-Fargo (the fake account scandal), Uber (the sexual harassment scandal) and Volkswagen (the diesel gate scandal), scandals affect all kinds of organizations. They have also attracted the attention of several scholars who investigated their causes, multidimensional consequences, and the strategies to prevent, manage and recover from scandals.

A particularly interesting point is that scandals are traditionally viewed as harmful and undesirable. There is no doubt that scandals can be, and most of the time are, extremely damaging for firms and organizations: legal sanctions, deterioration of financial performance and employees' morale, loss of customers and other suppliers who no longer trust them, and even bankruptcy. Examples include the well-known cases of Enron or WorldCom. More recently, the Volkswagen company has already spent more than s30bn around the world in fines, compensation and legal costs since the diesel gate scandal in 2015. In addition, scandals frequently spill over to other organizations or individuals who were not involved in the scandalous events. It is hence understandable that most companies want to avoid scandals or, at least, contain them when they become inevitable. In this article, we suggest to change this perspective and consider some scandals as potential positive events. Of course, we do not advocate for an absolute defense of scandals as a management tool. Our claim, which we believe to be more challenging for the current mental model of most managers and leaders, is that, under certain circumstances, a scandal may have positive consequences and benefit the affected company.

Our argument is that a scandal may have a 'reset function' to completely change the deeply rooted culture of an organization. The scandal dynamics involves considerable forces, notably social and media forces, that can be channeled to generate far-reaching changes in culture and strategy which could seem almost impossible to achieve otherwise. The 'reset button' may be pushed by what we name 'entrepreneurs'defined here as agents of collective action or agents of institutional changewho may be willing to strategically use a scandal to change the practices, habits, and culture of the firm in which they work. Again, we do not argue that a scandal should be provoked to benefit from the forces at stake nor that it is the only way to reach deep changes. Strong and charismatic leaders engaging swiftly in courageous actions -such as terminating people that personify the toxic habits even if they are top managers, providing role models or changing symbols, getting the reward system really aligned with the desired changescan constitute alternatives to a scandal. Beyond the previously mentioned actions, we invite practitioners and scholars, to make the best of a scandal once it becomes unavoidable.

A large literature has already considered scandals as a way to change the rules of the game at the institutional level as exemplified in several regulations, such as the 2002 Sarbanes-Oxley Act, which was a clear consequence of a wave of financial scandals. The new rules frequently rely on the willingness of authorities or other actors to guarantee and enforce a 'never again' promise. Nevertheless, the literature did not consider the possible need of a scandal from an inside perspective, when the organization and/or the individual(s) involved in the scandal see it as a 'necessary evil' to provoke a real change. Rather than examining the negative impacts of a scandal, which are usually considerable for the entangled organization and/or individuals, we propose a new perspective according to which a scandal can ultimately serve the long-term interests of an organization. This rationale can push decision-makers to not adopt a one-size-fitsall approach regarding scandals and consider, in some spe-cific circumstances, how to harness the scandal momentum to reach organizational changes that would be almost not accessible otherwise. Again, let us repeat that we do not argue that a scandal is systematically self-inflicted or beneficial. Instead, we contend that some transgressorsanticipating a possible involvement in a (future) scandalcan decide to use the (predictable) course of events to harness the formidable power of scandals.

Organizations, firms or social groups rest on rules, norms and institutions. Some of them are explicit and formal, otherslet us call them conventionsremain implicit, tacit and unwritten. They represent a non-negligible part of the culture of all kinds of organizations.

Conventions can be analyzed as spontaneously emerging from a process of cultural evolution which takes place within the organization. Employees who recurrently face the same problems, which are also the problems other employees are confronted to, try some solutions, fail and try again until they end up with a solution. That solution is adopted and then becomes a convention when a certain number of other employees also adopt it. Hence, individuals know that the probability to interact with someone who uses the convention is (sufficiently) high above a certain threshold. They thus have a tendency to use it. The convention becomes a part of the culture of the organization, a sort of institutional equilibrium within the organization. In other words, the convention is a form of 'common knowledge' among the individuals who are employed by the organization.

The existence of a corporate cultureviewed as a form of common knowledgeis useful for the organization in the sense that it facilitates transactions and other operations inside the organization, by economizing on transaction costs. Indeed, because conventions exist, there is no need to use external enforcement mechanisms. Another important point is that employees can coordinate with others without having to communicatecoordination rests on infinite expectations. However, as positive as it might be, such a common knowledge within the organization can be bad. The rules that emerge from the repetition of interactions within the firm are not necessarily the best ones. Arguing that corporate culture is a form of common knowledge means that it results from a process of natural selection but nothing guarantees that they are optimal. They are what they are.

For instance, financial or monetary incentive schemes have increasingly and maybe excessively become part of the managing techniques used in firms and organizations. Employees have then developed habits, conventions and hence a form of culture in reaction to the use of such incentives. The latter have thus shaped the employees' way of thinking and lead to a form of deeply rooted and yet deviant feature of corporate culture. Indeed, while financial incentives frequently improve individual performance, it is possible that employees do not earn them through moral means. Scholars have showed that individuals who are rewarded for goal achievement, are more likely to engage in unethical and questionable behavior, such as overstating their performance. The relationship between goal setting and unethical behavior is particularly strong when individuals fall just short of reaching their goals. Gaming the system and cheating to earn bonuses has even become endemic in many companies and organizations. A tragic example is provided in the "false positives scandal" where Colombia's armed forces, from 2002 to 2010 killed several thousands of civilians and dressed them as guerillas. These cold-blooded murders and "extrajudicial executions" were exploiting an incentive scheme by inflating body counts, leading officers and soldiers to get money, promotions, vacations and other benefits. As in the Wells Fargo fake accounts scandal, this incentive gaming, where agents divert their effort to maximize their private benefits at the expense of real or long-term organizational goals, is pervasive in many organizations and frequently lead to perverse outcomes.

Moreover, individuals do not necessarily perceive their behavior as bad. They do not consider themselves as cheaters. This behavior has just become a convention, a form of common knowledge among employees. Individuals collectively hide to themselves the truth about deviant behaviors. This normalization occurs through various mechanisms such as the use of euphemisms and word substitutions, which are significant in many organizations, especially businesses, while communicating on sensitive issues. The New York Times reported at least 48 euphemisms for getting fired. Obviously, these euphemisms serve to decrease transparency and public accountability, and, tend to obscure and distort meanings within the organization, thereby increasing the permissibility of otherwise unethical behaviors. For instance, bribesfrequently labelled as "facilitation fees" were described by Enron in the 1990s as funds to "educate Indians".

The aforementioned practices should be abandoned, as they are unethical, and, consequently a source of possible scandals. Changing the culture, that is, the convention used in the organization, is crucial to ensure its survival. One easily understands how difficult it might be. It requires time and energy and it can be costly -its benefits being only prospective. Moreover, replacing the convention may be like deviating a supertanker from its course. The organization may be, indeed, locked in a suboptimal situation. Although another convention has to be adopted, self-interest leads employees to not deviate from the convention that exists -precisely because it exists and that all use it. An exogenous shock is thus required for the system to be reset. We claim, however, the system would not change without a certain type of individuals who will act as entrepreneurs. Thanks to capacities that few others possessa spirit, a vision, or an alertness, an effectual logicthese individuals are able to perceive and exploit opportunities that others were not aware of. They are able to act in a genuinely new fashion that radically alters the path the society was following. The weight of inertia, the burden of the conventional order is less heavy and constraining for them than for other individuals. In other words, they are less constrained by the existing institutions and are therefore more likely to break them. To achieve such a task, an entrepreneur has to reveal a practice people adopt without being fully aware that their behavior has unethical and dangerous dimensions, which are so implicit and usual that they are hidden. The entrepreneur has to reveal the form of self-deception on which the corporate culture rests. Once the truth about those behaviors is revealed, a certain form of opacity about corporate culture disappears. It is then, over the course of events, whether it was planned or not, that the scandal breaks out. This is exactly what some whistleblowers do. To them, the only way to reset the system is to leak crucial information that can lead the organization to be entangled in a scandal. A convincing example can be found in the case of the former CEO of Olympus, Michael Woodford, who blew whistle on a huge fraud in his company. Interestingly, some individuals can be so committed to the organization that they see personal losses as acceptable costs in order of reaching higher-level goals, e.g., saving the organization and its legacy. The scandal can become an unexpected ally to generate this change by harnessing the formidable forces at work. Indeed, a scandal can inadvertently offer an opportunity window to exploit involved social forces to reach an objective which could seem almost impossible to reach otherwise. A scandal can reduce the resistance to change and makes individuals more receptive to new directions. In some plausible circumstances, a scandal can appear as the (only) solution to overcome inertia, status quo and prevailing social norms.

A scandal is a very specific social event. A typical scandal implies at least three parties: the transgressor or perpetrator of the scandal (e.g., the U.S. senators accused of insider trading ahead of market crash by dumping stocks after coronavirus briefing), the victim(s) (e.g., other stock holders, U. S. senators) and the public at large that is scandalized (e.g., U. S. citizens). A transgression, real or alleged, is not enough to generate a scandal that is "a normative violation that becomes widely known and a matter of public concern." This definition stresses the role of press and media in transforming a transgression into a scandal. All scandals thus share two fundamental properties, namely being mediatized and causing public outrage, which confer them a strong social power that can be potentially used by involved organizations/individuals in order to reach important goals. Indeed, media coverage and public outrage constitute strong pressures that can help influencers to initiate and provoke the changes they are looking for. A scandal can force concerned individuals to admit the reality and increase their readiness to subsequent changes. For instance, it has been argued that negative media coverage of scandals implying the FX Group generated a powerful disconfirmation of working practices among employees. Their personal identities were destabilized, which triggered an urgent 'will-tochange' to restore previous virtues such as pride, reputations and positive personal identities. Our definition corresponds to the strongest form of a scandal, but considering transgressions along a continuum can be insightful. Some transgressions remain inconsequential while others attract wide publicity and public outrage. Even intermediate situations that are not scandals in the full sense of the term can be used as catalysts to provoke changes, although the involved (social) forces are likely to be less powerful.

The power of a scandal is enormous and, if adequately harnessed, it can help the impacted organization to change in a way that would be impossible without the scandal. A scandal can energize those who have long plead for a change in the conventions and rules used in the organization. A scandal thus frequently creates a new reference point where the same effortse.g., stopping briberythat were previously considered as losses and unlikely, become easier to undertake because they can lead to potential gains. By changing the conventions around which the culture of the firm is organized, a scandal necessarily contributes to alter both the implicit as well as the explicit rules on which the organization rests.

Nevertheless, several parameters are likely to influence the success of such a strategy, like the identity of the scandal initiators, adequate timing, sufficient overlap between the transgression nature and the expected change, counterreactions of other implied individuals or organizations, the scandal strength compared to the impediments to overcome and energy needed to drive the expected change. For instance, the involvement of top-level leaders in a scandal can feed the media interest much more than if only some low-level employees are involved. If the overlap between the transgression nature (e.g., infidelity) and the expected change (e.g., anti-corruption measures) is low, the power of such a scandal to drive change could be too weak. The degree of public support/interest for the scandal initiator and/or exploiter and the media context of the considered scandal with crowding-in or crowding-out effects can also play a crucial role.

Without ignoring the complexity of the scandalous situations discussed above, let us consider scandals in a simplified two-dimensional framework (Figure 1 ). The first dimension corresponds to the degree to which the scandal nature overlaps the domain of expected change, from no overlap at all to a full overlap. The second dimension corresponds to the strength or power of scandals. Even if some events are labelled as scandals and are expected to be sensational and arouse public outrage, they are more 'non-events or 'damp squibs' than real scandals. A genuine scandal involves the considerable forces required to provoke deep change whereas a weak one is unlikely to elicit sufficient forces to reach the expected change.

Although these two dimensions are obviously continuums, we focus our discussion on polar cases. In case A, although there is a good overlap between the scandal nature and the expected change, the end-outcome is likely to be limited given that the power of the scandal is too weak to overcome the blocking forces. A classical illustration of this situation is when an organization or individual attempts and succeeds in covering up a scandal. Sometimes, the whitewashing strategy is so effective that a scandal does not really break or remains so limited that it is unlikely to elicit sufficient energies to drive change.

In case B, the change is very unlikely since the required conditions are not fulfilled. For instance, ethical misconduct such as data falsification seems widespread in many research institutions. Although several recent scandals have been shaken the scientific community, they are just the tip of the iceberg. If the targeted change is about scientific integrity, other rampant transgressions such as sexual harassment frequently remain unreported, undocumented and unlikely to provoke deep change in this specific domain.

In case C, the situation is ideal to provoke the expected change and activate the reset function of scandals by combining a full overlap between the scandal and expected change and the mobilization of strong social forces capable of overcoming blocking forces. The Siemens case study developed below constitutes a convincing example.

In case D, a strong change is possible but not necessarily in the expected domain, given that the overlap between the scandal nature and the expected change is weak. For instance, the sex scandal in which Dominique Strauss-Kahn, the former head of the International Monetary Fund (IMF) was embroiled in 2011, was unlikely going to affect the often decried IMF policies. Of course, in some cases, spillovers occur and allow to reach the expected change even if the initial overlap was not optimal.

Nevertheless, using a scandal as a 'reset button' (Case C) is demanding, notably in terms of time, money and resources, and resilience capacity. For instance, an individual may have to support a tarnished image with many consequences, such as financial losses, reduced employability and feelings of betrayal reinforced by peers' attitudes. This resilience capacity is also essential, given that some agents can attempt counter-measures (e.g. smearing the whistleblower) to keep things as they are or reduce the scope of change. The process is also risky for the transgressor(s) and the organization, given that the expected outcome is not always achieved. The involved forces can take unpredictable directions, making the end-result uncertain. Indeed, the destructive power of a scandal can be too strong and threaten the mere existence of the organization. Last but not least, the power of a scandal in driving change is not always planned and can be discovered and exploited over the course of events, especially when considered from an effectual perspective.

Noteworthy, although the consequences of a scandal can be negative in the short run, the scandal effect can enhance the company performance in the long run, beyond what was likely to be achieved without a scandal. Some scholars showed that investors react adversely to scandals, leading to an increase in stock price volatility of affected firms in the days following a scandal announcement, but stock price performance of the firms entangled in a scandal matches the performance of control firms in the long run postannouncement. The operating performance of the sample firms is even better than their matched counterparts in the years after the scandal. They attribute this reaction to the fact that companies entangled in a scandal respond more vigorously by undertaking corrective actions and putting safeguards in place, which ultimately confer them an advantage over companies that were not affected by a scandal. Our claim is that this long-run positive effect may be the consequence of an institutional change due to the role of entrepreneurs. This is what the example we discuss in the following section suggests.

In 2008, Siemens, one of the world's largest electrical engineering companies (a $100 billion company employing more than 400,000 people in 190 countries) agreed to a colossal $1.6bn legal settlement with American and European financial authorities for having been involved in a bribery scandal that erupted in 2002. The Germany-based manufacturer had violated the U.S. Foreign Corrupt Practices Act (FCPA) by engaging in a systematic practice of paying bribes to foreign government officials to get market share and increase its price. According to the report by the Securities and Exchange Commission, the pattern of bribery by Siemens was unprecedented in scale and geographic reach. More than $1.4 billion have been spent in bribes to government officials in Asia, Africa, Europe, the Middle East, and the Americas. Interestingly, inside the company, bribes were referred to as "NA" -a German abbreviation which means "useful money". The use of such a euphemism contributed to normalize a deviant behavior. Thus, according to the SEC report, the misconduct involved employees at all levels, including former senior management, and revealed a corporate culture long at odds with the FCPA. One of the German investigators, Uwe Dolata, stated that "bribery was Siemens's business model" and "Siemens had institutionalized corruption." Commentators emphasized it, bribery was part of "Siemens' then-corporate culture".

Thus, whatever were the reasons, bribery had become a conventiona business-as-usual way of workingat Siemens with a compliance program that existed only on paper. Employees knew they could use them given that the corporate culture helped the staff to feel they were "not only acceptable but implicitly encouraged". There are interactions between the 'conventions' within the firm and the 'rules' adopted in the legal system. For instance, before 1999, bribes were deductible as business expenses under the German tax code, and paying off a foreign official was not a criminal offense, although this practice was illegal in many countries where Siemens was implemented. This contributed to the 'institutionalization' of norms and their normalization.

As suggested above, because conventions are an equilibrium in an organization, they are difficult if not impossible to change rapidly. Hence, it is highly unlikely that the problems could have been solved from inside the company, that is, without a collective action agent. This is precisely what the Siemens board decided to do. For the first time of the company history, an outsider, Peter Löscher, was hired to become the new CEO. M. Löscher went further by doing more than just replacing the blamed guy. Rather, he 'behaved' as an entrepreneur decided to change the social equilibrium in + Models ORGDYN-100783; No. of Pages 7 Please cite this article in press as: G. Gilles, et al., Organ Dyn (2020), https://doi.org/10.1016/j.orgdyn.2020.100783 which the company was locked in by using the scandal as a means to change the convention used in the firm. In Löscher's terms, "the scandal created a sense of urgency without which change would have been much more difficult to achieve, regardless of who was CEO".

M. Löscher leveraged the scandal power to provoke deep change in the company. In a few months, the company replaced 80% of its top-tier executives, 70% of its second tier and 40% of its third tier. He used the scandal power to drive profound change in the company model with a great strength of execution, pushing analysts to present the company as having "set the gold standard over how to respond to scandal". Interestingly, P. Löscher reminded that changing the corporate culture to one driven by ethical standards "is a marathon for us, not a sprint". Thus, as explained by other scholars, the company underwent a remarkable learning process and cultural change which would not have been possible without the threat to its existence between 2006 and 2008. Ten years after the scandal, in 2018, Siemens announced strong financial performances. For instance, revenue increased to reach s86.8 billion with a net income of s5.6 billion (www.siemens.com).

Two sets of practical implications can be derived from our analysis. First, the assumption on which this paper rests is that corporate culture is a mix of explicit rulesinstitutions and implicit onesconventions. Institutions are designed, devised, built and correspond to the strategy the organization and its managers have decided to follow. An organization is also based on a lot of conventions that are used without having been explicitly chosen but simply emerged from the repeated interactions that take place within the firm and within the institutional framework created by the managers. This set of conventions is particularly crucial for the functioning of the organization. Indeed, as a form of common knowledge, conventions are very deeply rooted in the individual practices in the firm, and therefore are hard to change. It can be very positive because it guarantees a great stability at a low cost for the organization even if the convention corresponds to misconducts -such as bribery. In that case, the only way to change the situation, to move from one equilibrium to another is to generate a shock. However, changing the corporate culture of an organization requires an entrepreneur.

The second set of practical implications corresponds to the role of scandals from the perspective of changing the 'bad' conventions used in a firm. An entrepreneur who wants to change the corporate culture of a firm has to unveil the 'bad' conventions. He/she has thus to create or make the best of a scandal. A scandal can be used as an ultimate strategy to save a corporation. We invite practitioners to consider more closely the possible and counter-intuitive positive sides of a scandal, even for the organization entangled in the scandal. By mobilizing considerable social forces, a scandal can serve as an instrument of progress from an inside perspective. Reducing the likelihood of a scandal and designing smart strategies to contain the scandal effects are not the whole story. Being embroiled in a scandal has not to be simply considered as a detrimental event, but also in some circumstances, as the strategy of last resort to save the organization and its legacy. The scandal can sometimes participate to the creative destruction process. As a collateral effect, the scandal can even reveal individuals who are really committed to the organization. The very properties of a scandal such as public outrage and media coverage arouse social forces, that, if well-channeled, can help to overcome the impediments to change and contribute to the long term survival of the organization. A scandal can pave the way and even lead to a competitive advantage. This is what we illustrated with the case of Siemens.

If we go one step further, and turn these practical implications into more concrete directions that practitioners could follow once the reset button has been pushed, we could suggest that rather than dedicating all resources to contain the scandal, it makes sense in some circumstances to embrace it in order to achieve the changes that seemed otherwise almost inaccessible. Moreover, the practitioner must resist the temptation to just settle for some cosmetic measures (e.g., a few bad apples approach by identifying some fall guys and possibly firing them) that can satisfy the media and public appetites without getting the bottom of things (e.g., addressing the "bad barrel" influence or the deficiencies at the heart of the system). Furthermore, the scandal has the power to nullify the advantages of highstatus individuals who sometimes feel themselves protected and get away with their transgressions. The scandal offers an opportunity window to challenge the clout of high-status individuals or deeply rooted practices. Nevertheless, this opportunity must be seized because it is not long lasting and requires strong, clear and rapid actions.

Certainly, a scandal is undesirable in the short term. Nevertheless, it can be a 'necessary evil' to achieve the needed change and has positive consequences in the medium/long term even for the firms that are affected by the scandal. Reaching positive changes through a scandal can be compared to perform a high-wire exercise without a safety net. The process is demanding notably in terms of resilience capacity, but the results can be remarkable as in the Siemens case. Nevertheless, recovering from a scandal and remaining at a top position in terms of ethical standards require constant vigilance and efforts. Undoubtedly, this is far from being systematic. Conditions have to be fulfilled. Examining more precisely the conditions of a scandal-driven success constitutes a promising avenue for further research. 

For more recent studies and references about the importance of entrepreneurs -in the large sense of the word -for institutional change, see N. Elert and M. Henrekson, Evasive entrepreneurship

Media attention to large-scale corporate scandals: Hype and boredom in the age of social media

How does the media frame corporate scandals? The case of German newspapers and the Volkswagen diesel scandal

For crowding-in and crowding-out effects in relation to scandals, see the work of R. Barkemeyer and colleagues mentioned above. For more information regarding investors reactions after a scandal, see

Can a leader of moral character survive and do good in a corrupt organization? Organizational Dynamics, Forthcoming. Regarding the power of a scandal to threaten status

His main research interests concern the application of experimental methods and behavioral insights for a better understanding of human biases, decisions and behaviors, such as antisocial behaviors or the strategic use of words. His work has notably appeared in Kyklos

His research interests relate mainly to the economic analysis of law and the history of economic thought. His work has been published in journals like the

Naoufel Mzoughi participated to several projects leading to publications in high-ranked academic journals and recommendations to decision-makers, notably regarding the way behavioral dimensions can be used to improve the effectiveness of environmental policies. His work has been published in Climate Policy