“I am not a crook”: How companies can respond when a partner is embroiled in scandal

GAINESVILLE, Fla. – Watergate. The Iran-Contra Affair. Monica Lewinsky.

Political scandals like these are rooted deep in the minds of Americans across generations. With new ones coming to light even now, like potential insider trading among U.S. Senators amid the COVID-19 outbreak, it’s no surprise that in 2018, 75 percent of voters indicated that corruption in politics was their top concern in the then-upcoming election cycle.  

The American people shouldn’t be the only ones concerned, though. Businesses can be just as affected by political scandal, often with more substantial consequences.

In the course of business, companies form exchange relationships with others, like buyers, suppliers, employees and even politicians. These relationships are, for the most part, necessary and beneficial to companies for a number of reasons, like providing access to needed resources. However, when their partners engage in misconduct, it can create scandals that ultimately lead the company to recalculate how beneficial the exchange relationship is.

Previous theories across multiple disciplines ascertain that when companies find themselves involved with a partner embroiled in scandal, they face a risk tradeoff. While maintaining an exchange relationship after a partner is involved in a scandal could cause reputational harm to a company, ending the relationship could hinder the company’s ability to gain access to necessary resources.

“Taken together, we…posit that in post-misconduct driven decisions, firms are torn between opposing desires – avoid negative spillover or preserve beneficial relationships,” write researchers Aaron Hill of the UF Warrington College of Business, Michael Nalick of the University of Denver, Scott Kuban of Tulane University and Jason W. Ridge of the University of Arkansas.

While it may seem that companies are stuck between choosing to save face or save their relationship, new research from Hill, Nalick, Kuban and Ridge suggests there are alternatives. In their paper “Too hot to handle and too valuable to drop: An expanded conceptualization of firms’ reactions to exchange partner misconduct,” the researchers dive into additional strategies companies can use when responding to misconduct on the part of an exchange partner.

“This research challenges the notion of a simple maintain or end decision in the extant negative spillover literature and extends our theoretical knowledge about alternative strategies for firms to manage partner misconduct,” the researchers write.

Using a sample of misconduct by politicians, an especially valuable exchange partner for firms, as companies benefit from relationships with politicians in the form of government contracts, subsidies and favorable regulations, the researchers developed a more practical understanding of company reactions to partner misconduct.

Based on additional theories in the field and their study of misconduct by politicians, the researchers suggest that companies can (1) increase or decrease commitments to transgressors, (2) hedge against risks by adding new partners while maintaining existing ones or (3) ‘boomerang’ by restarting exchange after previously ending commitments.

By increasing or decreasing commitments, “firms…strengthen (increase) or distance from (decrease) the relationship to manage risk tradeoffs; rather than innocent others bearing either association or detachment risks entirely, then, they may alter commitment levels according to associated upsides and downsides,” the researchers write.

Adding new partners while maintaining existing ones allows firms to “hedge their risks, pursuing new options to reduce downsides while keeping options with upsides open.”

For firms that decide to end exchange relationships, they don’t have to do so permanently. The researchers suggest, “firms are more likely to ‘boomerang’ (i.e., restart an ended relationship after a temporal separation) if the offender survives the misconduct but are less likely to rekindle exchange with their partner as relational uncertainty increases.”

“In total, our findings also offer practice implications for firms,” the researchers write. “In particular, the broader conceptualization of alternatives for addressing exchange partner misconduct offers a more nuanced and realistic view of the situation that confronts practitioners.”

This research is forthcoming in Academy of Management Journal.