Opinion: Corporate scandals may start in the boardroom, but their impact can spread throughout an organisation, eroding employee trust, damaging morale and making it harder to attract and retain talent, argues Karlie Cremin
We often see most corporate scandals following a familiar script. The headlines focus on executives. Boards commission reviews. Regulators investigate. Share prices wobble. Public relations teams work overtime to repair the company’s reputation.
Behind the scenes, there is another group that continues to bear the consequences long after the headlines disappear: the employees who had nothing to do with the misconduct.
Recent scrutiny of firms, such as KPMG, has highlighted just how quickly a prestigious employer can become synonymous with controversy. Overnight, a company that employees once proudly listed on their LinkedIn profile or mentioned at a dinner party can become a source of embarrassment. For the vast majority of staff who have acted with integrity throughout their careers, that is a heavy burden to carry.
Corporate misconduct is often viewed as a governance issue. In reality, it is equally a leadership and cultural issue. While organisations rightly focus on rebuilding external trust, they often underestimate the lasting impact on the people inside the business.
The lasting cost of organisational shame
Work forms part of our identity. People invest years building careers within organisations whose reputations become intertwined with their own. When that reputation is damaged, the effects ripple far beyond the boardroom.
Employees begin questioning how others perceive them. Conversations with clients become more difficult. Family and friends ask uncomfortable questions. Recruiters may assume that everyone associated with the organisation shares responsibility for what has occurred.
The reality is that most employees had no involvement in the decisions that led to the scandal. Even then, shame has a remarkable ability to spread through an organisation regardless of where responsibility actually sits.
I recently heard a woman who worked for one of Australia’s casinos during its regulatory challenges describe the atmosphere following the investigations.
She spoke about the shame that permeated every level of the business, from frontline cashiers through to senior executives. People who had simply turned up each day to do their jobs suddenly found themselves carrying the weight of the organisation’s reputation.
That kind of cultural damage cannot be repaired with a new communications strategy. It can take years before employees feel proud of where they work again.
Fear replaces good judgement
Trust is the first thing that disappears after a corporate scandal.
Employees no longer feel confident about what the right decision looks like. They become uncertain about expectations, hesitant to exercise judgement and increasingly fearful of making mistakes.
Ironically, organisations often reinforce this fear through their response.
Businesses with a historically high appetite for risk frequently attempt to swing rapidly in the opposite direction. They introduce additional approvals, more layers of governance, stricter reporting requirements and increasingly complex compliance processes.
Strong governance is important and some of these changes are necessary.
However, when organisations overcorrect, they risk replacing one problem with another.
Employees are asked to follow processes that no longer fit the realities of the work.
Innovation stalls. Good people spend more time navigating bureaucracy than creating value. Culture becomes less about doing the right thing and more about avoiding blame.
The talent challenge
The consequences extend well beyond the current workforce.
Scandals damage an organisation’s ability to attract talent for years after the event. Candidates who place a high value on ethics and organisational culture often remove themselves from consideration before an employer has the opportunity to rebuild its reputation.
Meanwhile, existing high performers begin reconsidering whether they still want their professional identity tied to the organisation.
This creates a dangerous cycle.
The very people who could help rebuild the culture are often the first to leave, while attracting new talent becomes a serious challenge. Organisations are left trying to repair their reputation with a diminished pool of trusted leaders and future talent.
This is why cultural recovery should never be viewed as a communications exercise alone.
Leaders determine whether organisations recover
One of the greatest mistakes leaders make after a scandal is assuming that restoring public confidence will automatically restore employee confidence.
It takes more, and employees are asking for something different.
They want honesty about what happened, accountability where it belongs and clarity about what will genuinely change, and what will not. Most importantly, they want confidence that they can once again exercise sound judgement without operating in an environment driven by fear.
This requires leaders to resist the temptation to simply introduce more rules.
Instead, leaders need to show employees what decisions people are still trusted to make and which behaviours genuinely need to change. Otherwise, staff are left guessing whether initiative will be rewarded or punished.
Reputation is rebuilt from the inside out
Corporate scandals rarely begin with one catastrophic decision. They are usually the result of cultural drift, where behaviours become normalised over time until someone finally shines a light on them.
Recovery follows the same principle.
It is never achieved through a single announcement or governance review. It happens one conversation, one leadership decision and one restored relationship at a time.
Companies will rightly invest significant effort rebuilding their reputation with customers, regulators and investors, often not realising the employees are always watching.
Building lasting recovery begins much closer to home. It starts when employees once again feel proud to tell people where they work.
While organisations may survive a scandal, they only truly recover when the people inside them believe they deserve to.
Karlie Cremin is the CEO of DLPA and Crestcom Australia, organisations dedicated to helping businesses solve complex people challenges with practical, real-world solutions.
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