Corporate scandals: Balancing moral legitimacy and pressures on profits

Team members across departments watch leaders excuse small lapses. So they too jump in on the cheating shortcuts.

Client feedback starts to turn negative. Vendors begin to ask for cash rather than credit terms. The board of directors pushes for a quick clean-up of the mess, but human resources gets sidelined as if ethics lives only in the audit department rather than in everyday staff behaviour.

By the time regulators come to investigate, the company’s profits have dropped by 40 percent. Researchers Elaine Farndale, Jaap Paauwe, Paul Boselie and Sven Horak trace patterns like the above example. Their research looks at corporate scandals in a unique way.

The new study sees them as jolts that can puncture the business as usual vibe within organisations and then resets company priorities. The research uses something called event systems thinking.

The event systems thinking shows how three different features of scandals carry real weight internally.

First, the strength of the scandal event describes the novelty of it, the disruption factor of it and then the critical stakes of the scandal. Second, the space of a scandal captures where a corporate scandal starts and then how it spreads across organisational departments and even beyond the firm out into the market and external stakeholders.

Third, the timing of a scandal reflects the urgency or force of it and then the long lingering tail of the scandal reveals ripple effects just like throwing a stone in water and seeing the ripples emanate out from the impact point.

The research uncovers how scandals force leaders to re-balance their moral legitimacy and the commensurate pressures on profits.

Organisationally, and all the post-scandal recalibration lands squarely in the human resources department’s docket because organisational culture, reward incentives and daily employee habits live with the staff as people, not in abstract policies and standard operating procedures.

The upshot of scandal feels both simple and hard all at once. Then recovery demands internal staff and managerial behaviour change at large scale, and human resources sits at the intersection of corporate risk, compliance, and legal to make that change happen.

The research findings rest on in depth case studies in multinational firms across various industries finance, chemicals, and pharmaceuticals. The researchers interviewed a myriad of executives both in corporate headquarters and in country units around the world.

Read: 27 NSE-listed firms fail transparency and risk control test

The study also triangulated with companies’ internal documents and compared firms that endured waves and waves of public crises, including one bank that narrowly escaped a scandal headline.

The study found that some scandals arrive as clusters that hit quickly and repeatedly. A look at Tesla during the first half of 2025 shows waves of scandals, whether deserved or undeserved.

Others unfold over years but still reshape company operations when they do hit. Some begin at the very top of organisations through reckless company strategy and even perverse rewards like the 2008 mortgage loan scandals at many banks in the United States.

Other scandals bubble up from front line sales agents falsely selling products or services while managers look the other way and ignore the fraudulent reality. But regardless of the path a scandal took to emerge, the pattern repeats itself within firms.

Once external stakeholders learn of misconduct, the organisation faces high strength shocks, like the Volkswagen 2015 exhaust scandal, wide space dispersion through functions and geographies, and long-time recovery timeline arcs. These contexts set the stage for human resources role shifts.

Leaders who want to act before a scandal headline lands can borrow practical lessons from the research. Build a forward posture by running regular risk and culture scans with human resources, compliance, and legal in the same room.

Then, tie at least one key performance indicator in every sensitive role to behaviour conduct. Specify who decides and who escalates when trade-offs arise.

Encourage managers to practise real conversations about small breaches so their staff can stop tiptoeing around issues when they arise.

Have a management or leadership issue, question, or challenge? Reach out to Dr. Scott through @ScottProfessor on X or on email [email protected]