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E-MailBoris Groysberg is professor of business administration in the Organizational Behavior unit at the Harvard Business School; Eric Lin is an Assistant Professor at the United States Military Academy; and George Serafeim is the Jakurski Family Associate Professor of Business Administration at Harvard Business School. This post is based on their recent paper.
Corporate scandals can have serious consequences on human capital. While prior research has shown the consequences on executives and directors that had oversight of the organization during a misconduct or were directly responsible for a misconduct, in a recent paper, we examine the effect of stigma on future compensation for individuals that left many years before the misconduct occurred and were never implicated in the misconduct.
Wiesenfeld et al. (2008) and Pozner (2008) have proposed stigma theory (Goffman, 1963) as a way to better understand the devaluation of executives connected to corporate wrongdoing. Stigma is not determined solely on facts; rather, it arises out of a social process driven by collective norms, by perceptions of the stigmatized, and by the anticipated perceptions of others (Goffman, 1963; Jones, Farina, Hastorf, Miller, & Scott, 1984). Thus, the process of stigmatization supports the possibility of boundedly rational responses and introduces the role of sensemaking in organizational contexts (Kulik, Bainbridge, & Cregan, 2008; Weick, 1995).
Literature on stigma by association suggests that minor, even random, connection with a stigmatized person can have harmful social effects (Corrigan & Miller, 2004; Goffman, 1963; Goldstein & Johnson, 1997; Kulik et al., 2008; Mehta & Farina, 1988; Ostman & Kjellin, 2002; Penny & Haddock, 2007; Pryor, Reeder, & Monroe, 2012). This suggests managers with more distal connections to organizational misconduct still could be affected, albeit through more measured mechanisms than total exclusion (Hebl & Mannix, 2003; Pryor, Reeder, & Monroe, 2012). According to the stigma literature, negative attribution can attach to individuals both through personal wrongdoing and mere association with stigmatized others (Goffman, 1963; Greve, Palmer, & Pozner, 2010; Pozner, 2008). Stigma by association can manifest even in clear cases of innocence from misconduct. This reality has been given less attention in the literature on organizational misconduct and its aftereffects, and we investigate it explicitly here.
We examine a population of job-switching executives with work histories at firms that committed financial misconduct. These executives’ employment clearly predates the misconduct and they were never legally implicated in the scandal. Our data on 2,034 executives from one of the leading executive search firms allows to observe the compensation for an executive before and after switching firms. Controlling for past compensation and other individual and job characteristics we find that executives with a financial misconduct firm on their vita, all else equal, receive a lower compensation when moving to another position. We find that this effect is stronger for executives that are in the finance function that held more senior positions in the organization that had the misconduct event. Moreover, we find that more recent misconducts exhibit stronger association with lower compensation, as predicted by stigma theory.
We complement our empirical analysis with field data we collected from interviewing experienced executive search consultants thereby gaining significant knowledge on the mechanism through which stigma operates. Our work reveals that stigma could have a much wider application and impact beyond the decision to embrace or banish top executives. We also argue that there are other mechanisms by which the impact of stigma finds its way to affected executives. A direct devaluation in the form of pay despite the decision to hire suggests negative career effects may come not only through the motivation to avoid stigma by association, but also through a willingness to exploit it. Hiring firms bear the expense of background checks, and the exonerating information from such due diligence is received privately. Even if this due diligence establishes a candidate’s innocence to one firm, that firm may recognize that other competing hirers face an information barrier to considering the stigmatized candidate. We argue how such information costs for exonerating executives who are loosely associated with misconduct allow firms to offer lower pay, even in cases where such candidates are not rejected outright.
In addition to improving our understanding of how professional devaluation occurs, our findings have several importance practical implications. To the extent that the effect of organizational misconduct can be felt among the ranks of alumni, the effect of such wrongdoing on careers may be far greater than previously thought. If such effects near the peripheries are driven by perceived association with misconduct rather than the commission of a misdeed itself, then job-seeking executives have latitude to improve their outcomes by shaping such perceptions. By influencing the general salience of available exonerating evidence, candidates may be able to diminish likely misdirected blame.
The complete paper is available for download here.
