Professor Jung-Hoon Han of Sungkyunkwan University’s SKK GSB has published a paper in the prestigious Strategic Management Journal, revealing how media and public interest in corporate misconduct is determined.

Prof. Han, with co-authors Timothy G. Pollock (University of Tennessee – Knoxville) and Srikanth Paruchuri (Texas A&M University), recently published a research paper titled “Public enemies? The differential effects of reputation and celebrity on corporate misconduct scandalization” in the Strategic Management Journal.

When firms engage in misconduct, widely known firms tend to attract media attention. This is because they are already highly visible, and the positive evaluation they have received clashes the harm they have caused.

Nonetheless, there can be multiple ways through which firms become well known. On the one hand, firms can gain “high reputation” based on the rational assessment of their consistently superior performance and capability. On the other hand, firms can cultivate emotional resonance from stakeholders through unconventional and attractive behaviors and traits, leading them to be treated like “celebrities.” The firms listed on Fortune’s “Most Admired Companies” ranking exemplifies high-reputation firms. Tesla, which had rarely recorded solid financial performance until recently but nonetheless have cultivated a strong fan base, can be considered a celebrity firm.

The rational and emotional bases underlying the evaluation of high-reputation and celebrity firms can create differences in how their misconduct is treated by the media. People are likely to engage in rational information processing when viewing high-reputation firms’ misconduct. Thus, high-reputation firms’ misconduct is more likely to be publicized by the media – and become scandalized – when the misconduct is objectively severe, for instance, a data breach that has exposed 500 million customer accounts. Celebrity firms’ misconduct is less likely to be scandalized under such circumstances because overlooking factual details is a typical characteristic of emotional information processing.

However, perceived severity may not always match objective severity. For instance, when United Airlines violently removed a passenger in 2017, the incident created an intense collective perception of severity and sparked a scandal, even though the harm was practically limited to a single individual. Such collective perception of severity increases the likelihood celebrity firms’ misconduct becomes scandalized because it fuels the public’s emotional interest in the firms. In contrast, perceived severity weakens the likelihood of high-reputation firms’ misconduct being scandalized because the public interest is likely to diminish with repeated exposure to the same information.

These findings have important implications for firms’ crisis management because what people expect from firms differs based on the rational and emotional information processing. High-reputation firms should focus on providing detailed information about the cause of their misconduct and their remedial plans. Celebrity firms, in contrast, should focus on tempering emotional fervor and buzz surrounding their misconduct and try to devise creative and unconventional remedial actions that could potentially revive stakeholders’ positive emotional resonance.

Original Journal: https://doi.org/10.1002/smj.3638

As shown in the graph above, as the objective severity of misconduct increases, the effect of reputation gradually increases (a), while the effect of attachment decreases and becomes statistically insignificant (b). Conversely, as the perceived severity increases, the effect of reputation gradually decreases to a statistically insignificant level (c), while the effect of attachment becomes increasingly stronger (d).