The Impact of Corporate Scandals on Customer Trust

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Introduction

Customer trust plays an essential role in a company’s management as well as performance. For instance, a significant percentage of the performing companies in the world have invested in customer trust. Through management and production of better services to the customers, many firms have increased their profits. However, some of the companies that have been found with scandals have declined their customer trust level, thus increasing their losses. As such, customer trust is the number one policy to improve performance in the future. However, some of the research studies have affirmed that it is possible for investment companies to perform well without much focus on customer trust. Moreover, the firms should invest in better quality and other features of production.

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Thus, the research study aims to expose the impact of corporate scandals on customer trust in the global business arena. Corporate scandals have been the current debate in the world. For example, a significant percentage of the performing organizations have lost finances because of customer trust misuse. Therefore, it is easy for an organization to lose customer trust through the nature of the relationship created. Many customers value the kind of the relationship that they are offered from the company level. Therefore, corporate scandals have highly impacted the customer relationship and further lead to more company losses.

Research Questions

The following research questions were identified:

  1. What are the impacts of scandals on employee trust?
  2. How can organizations maintain trust of the employees?

Literature Review

This section presents a comprehensive overview of the impacts of scandals on customer trust in an organization. More specially, this chapter is created on the breakdown of the substantial matters associated to client trust and how they have wedged the performance of a company. The chapter has also given an insight into the current situation of scandals in organizations worldwide. Therefore, it is hoped that the study will be broadened by covering these issues, and more information will be presented.

Customers’ trust in a company is vital for its development, particularly for the success of its marketing campaigns and its representation in the selected economic environment. Although a company can garner attention without gaining customers’ trust, the specified type of publicity is likely to be very superficial and quite temporary (Davies & Olmedo-Cifuentes, 2016). Therefore, trust should be regarded as the foundation for an organization’ survival in the target economy (Paparoidamis et al., 2019). However, once a firm tarnishes its reputation with a scandal, it is likely to lose its buyers’ trust, which will immediately lead to a loss of its public influence.

Research points to the fact that the trust-based relationships between an organization and its buyers are disrupted immediately and permanently once a company is caught in an incriminating situation. Specifically, the cases of Enron and the related instances of corporate fraud indicate that trust remains one of the essential components of a buyer’s decision to purchase a product or a service form a company (Albeksh, 2016). In turn, corporate misconduct and involvement in different types of fraudulent activities lead to the destruction of a firm’s reputation. For instance, the case of Wirecard proves that corporate fraud and the related activities showing a firm abusing its influence and power immediately cause disruption and, quite often the following destruction of its reputation (“Wirecard’s future hangs in balance as trust in the company erodes,” 2020). Therefore, many firms have been affected by the issue of corporate trust as it hinders the level of customer loyalty in business.

In turn, people’s propensity to avoid purchasing products and services from an organization that has demolished its reputation converges to zero. Although buyers themselves are unlikely to be shunned by association for using the services of such a company, the willingness among general audiences to use the services and products of companies that have misused their buyers’ trust drops exponentially (Witman, 2018). Therefore, there are reasons to expect that the company’s profits will reduce. There are correlation and causation between a company’s involvement in a corporate scandal and customers’ level of trust toward a company.

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Moreover, studies show that the extent to which customers’ trust and be undermined varies depending on the type of scandal observed in the target organizational environment. For instance, making an honest mistake is deemed the least offensive case of a corporate scandal (Clemente & Gabbioneta, 2017). Failing to tell the truth and making unfair decisions are ranked as the second-and third-to-last places on the scale of untrustworthiness. In turn, failing to respond to criticism is deemed more egregious, whereas bending the law takes second place on the list of offensiveness (Montecchi et al., 2019). According to a study by Kircova and Esen’s (2018), the last and definitely the most unforgivable type of misconduct is acting irresponsibly. Therefore, the variation in the intensity of the offenses impacts more on the purchasing power.

However, there have been several cases that could be considered an exception to the set rule. For instance, the case of exploring smartphones has not led to customers losing their trust in Samsung and its product entirely (Yun et al., 2018). Similarly, Volkswagen has managed to overcome its emissions scandal and survive in the global market (Dworaczek et al., 2020). Specifically, the organizations managed to turn the specified failure and quality oversight into an obvious opportunity to gain more attention and publicity.

Nevertheless, most cases involving corporate scandals have been detrimental to the relationships between customers and organizations. Customers’ trust represents an essential resource that organizations tend to overlook, yet its absence becomes obvious and quite tangible immediately. Thus, proving the correlation and causation between corporate scandals and the extent of customers’ trust is essential to understanding how companies can survive an instance of being involved in an unflattering situation.

Conceptual Framework

The study will be based on two theories: the organization trust theory and commitment-trust theory. The two theories have helped the researcher come up with the exact impact of trust in an organization. Moreover, how factors such as the scandals in business can impact the relationship between customers and the organization has altered customer behaviour. Thus, this further leads to more loss in an organization through the lack of trust. These theories have also explained the benefits of trust, considering the current situation of outrages in business across the world.

Organization Trust Theory

Trust is an essential aspect of the business environment of any company. More notably, the organization trust theory has exposed the nature of employee relationships in business and how they impact customer behaviour. The nature of the decisions highly determines the purchasing power that employees make and their internal relationships in the business. The theory has further argued that if the employees have no good relationships, there is always an adverse impact on customer buying power. The scandals that always arise in many companies have been linked with internal employee relationships. Thus, this model will have an essential position in attaining the aims of this study.

Commitment Trust Theory

The theory has established the best grounds in marketing through the emphasis of customer-organization relationships. For instance, this theory has identified two major factors that have an essential role in successful relationships and business performance: commitment and trust. Relationship marketing is a critical factor in measuring the performance of business organizations globally. For instance, it gives the primary business reasons to maintain customer-business trust. The theory has also focused on the essential aspects of growth and how companies are adversely affected by scandals. Mistrust is one of the factors that have negatively impacted large businesses in the world. For example, companies such as Apple Inc. have been found with mistrust issues that have impacted their customer-firm relationships. Therefore, this theory has played a significant role in highlighting the significant factors affecting trust, such as outrages in organizations.

Hypothesis

  • H0: A company’s involvement in a corporate scandal negatively affects consumers’ trust in a company.
  • H1: A company’s involvement in a corporate scandal does not affect consumers’ trust in a company.

Methodology

Introduction

The research methodology section plays a significant role in the structure of the study. More specially, the chapter highlights the essential processes and factors that will be considered during the study. The chapter will also equip the study with the best measures to credit the research well to the participants through ethical considerations in research. For example, this chapter includes research design, population, sample size, data collection and analysis methods. Furthermore, it illustrates how the major data collection process will be conducted. Therefore, this section aims at linking the research with the actual fieldwork process.

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Research design

The study followed a quantitative analysis design since it provided empirical data that was used in data analysis. For instance, data in this study was collected through the questionnaire method because it was easy to collect the specific organisation’s data. The questionnaires could also save more time during the study as they could be easily delivered, and the participant is guided on how to answer the questions. Alternatively, the questions offered the participant a room to answer the questions so that their confidential and privacy aspects were maintained. However, the research questions could give the participant enough freedom as the questions were straightforward, and exact answers were provided. Thus, quantitative data analysis design was the best as it could determine the impact of the organisations’ scandals on client trust.

Population

Choosing the population to use in a study is important as it determines the research’s validity. For example, the type of population chosen determines if the study will meet the beginning’s objectives. This study covers the impact of scandals on an organization; thus, the population must be chosen from the customers and employees. As such, the employees from the organizations will make the data collection process easy and more realistic. A total of 512 employees and customers were selected to achieve the set objectives at the beginning of the study. Hence, it was easy for the researcher to select a sample from the firm because the staff and customers were available.

Sample Size

A sample of 512 employees were selected from the total population to make the data collection process easy and achievable. A simple random sample was conducted to ensure that the process was not biased. Taherdoost (2016) has argued that sampling plays an essential role in research. More significantly, in the process of developing research, the sampling framework must be observed. Therefore, the narrowing down to specific population helped the researcher in collecting the most accurate data.

Data Collection Methods

Data was collected through questionnaires as gathering at the field was easy to conduct. More specifically, it was cheap and convenient as it was online because of the impact of Covid-19 globally. The online questionnaires also saved more time during the fieldwork of the survey. A total of 512 questionnaires were designed and sent to the organization. It was therefore easy to collect and distribute the surveys to the required participants during the research.

Data Analysis

Data analysis is an essential section of research as it gives the study credibility. Data assessment was conducted through SPSS and AMOS software where the hypothesis was tested and t-test. SPSS was used because it can analyze bulk data, and it was easy to use. After data was analyzed, it was presented in the form of tables and graphs. Data presentation plays an integral role in data collection as it grants the audience the best conclusions concerning the conducted study. Therefore, through this section, the researcher could make the right conclusions as well as recommendations.

Results

Our independent variable is the Customer trust and the dependent one is the scandals; trustworthy, honest, and sincere. Based on the analysis done in the SPSS software, the variables had a key relationship. The section has descriptive, and regression analysis that were applied in analysing the data. The descriptive statistics involved the application of mean and standard deviation as the main measures of central tendency.

Descriptive Statistics

Mean Std. Deviation N
Dummy Scandal .7930 .40557 512
Trustworthy 3.79 2.006 512
Honest 3.66 2.056 512
Sincere 3.73 1.972 512

Correlations

Dummy Scandal Trustworthy Honest Sincere
Pearson Correlation Dummy Scandal 1.000 -.343 -.345 -.341
Trustworthy -.343 1.000 .877 .921
Honest -.345 .877 1.000 .899
Sincere -.341 .921 .899 1.000
Sig. (1-tailed) Dummy Scandal . .000 .000 .000
Trustworthy .000 . .000 .000
Honest .000 .000 . .000
Sincere .000 .000 .000 .
N Dummy Scandal 512 512 512 512
Trustworthy 512 512 512 512
Honest 512 512 512 512
Sincere 512 512 512 512

Variables Entered/Removeda

Model Variables Entered Variables Removed Method
1 Sincere, Honest, Trustworthyb . Enter
a. Dependent Variable: Dummy Scandal
b. All requested variables entered.

Model Summaryb

Model R R Square Adjusted R Square Std. Error of the Estimate Change Statistics
R Square Change F Change df1
1 .356a .127 .122 .38013 .127 24.568 3

Model Summaryb

Model Change Statistics
df2 Sig. F Change
1 508 .000 2.053
a. Predictors: (Constant), Sincere, Honest, Trustworthy
b. Dependent Variable: Dummy Scandal

Discussion

The results collected have affirmed that various scandals affect an organization differently. For instance, the first scandal had a higher impact on the organization as compared to the rest. The analysis done has also depicted the value of R-square which is 0.127 which is less than 0.5. There is a negative relationship between the scandals and the level of trust variables. More specifically, the level of trust is affected adversely by the business outrages. Every firm has its way of managing the mistrust and embezzlement issues. Many organizations have developed the ways of solving management problems. Therefore, this creates the difference in the impacts caused by business outrages in a firm.

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Limitations

During the study, some limitations could have challenged the data collection process. However, it was possible to have all the data gathered despite the problems that the researcher encountered during the fieldwork process. As such, the following were the major barriers towards the data assessment:

  1. Some of the questions were not answered by the respondents. Based on the designed questionnaires, some participants felt that it was not right to answer the questions which required inner details concerning the scandals that had happened in the firm. This problem created difficulties in assessing the correct information as the primary aim was to estimate the intensity of various scandals in business. Therefore, it was hard to create the accurate conclusions because the participants could have not given precise answers.
  2. The study was conducted on one sector of employment, thus could not verify the other sections of the organization. For instance, in this study, the researcher had focused on one firm; therefore, the study was not reliable as it could have been done in many organizations. Moreover, the impact of different scandals is different from one organization to another. It becomes challenging to come up with the required conclusion based on the data collected from the study.

Conclusion

Every business has devised ways of reducing the impacts of scandals in its management. Without better strategies, the solutions to the issues of business outrages will be an unaccomplished dream. The study has affirmed that there are many scandals in business, and they affect the business differently. More significantly, customer trust is the most affected section, which has caused a significant impact on the organisation’s profits. Customer trust has affected many firms’ mode of operation through the impact of mistrust in the administration section. Therefore, by solving the trust issues organization can perform better.

References

Albeksh, H. M. A. (2016). The crisis of the ethics of audit profession: Collapse of Enron Company and the lessons learned. Open Access Library Journal, 3(11), 1-18.

Clemente, M., & Gabbioneta, C. (2017). How does the media frame corporate scandals? The case of German newspapers and the Volkswagen diesel scandal. Journal of Management Inquiry, 26(3), 287-302.

Davies, G., & Olmedo-Cifuentes, I. (2016). Corporate misconduct and the loss of trust. European Journal of Marketing, 50(7/8), 1426-1447.

Dworaczek, F., Marissal, F., Niemann, J., Seimel, L. M., & Meier, N. (2020). The financial damage of Volkswagen’s diesel emissions scandal–a multi-stakeholder-perspective. Management Studies, 10(2), 30-38.

Kircova, I., & Esen, E. (2018). The effect of corporate reputation on consumer behaviour and purchase intentions. Management Research and Practice, 10(4), 21-32.

Montecchi, M., Plangger, K., & Etter, M. (2019). It’s real, trust me! Establishing supply chain provenance using blockchain. Business Horizons, 62(3), 283-293.

Paparoidamis, N. G., Katsikeas, C. S., & Chumpitaz, R. (2019). The role of supplier performance in building customer trust and loyalty: A cross-country examination. Industrial Marketing Management, 78, 183-197.

Taherdoost, H. (2016). Sampling methods in research methodology; How to choose a sampling technique for research. SSRN Electronic Journal, 5(2), 18-27. Web.

Willard, C. (2020). Statistical methods: An introduction to basic statistical concepts and analysis. Routledge.

Wirecard’s future hangs in balance as trust in the company erodes. (2020). The National. Web.

Witman, P. D. (2018). Teaching case: “What gets measured, gets managed”: The Wells Fargo account opening scandal. Journal of Information Systems Education, 29(3), 131-138.

Yun, J. J., Jeon, J., Park, K., & Zhao, X. (2018). Benefits and costs of closed innovation strategy: Analysis of Samsung’s Galaxy Note 7 Explosion and withdrawal scandal. Journal of Open Innovation: Technology, Market, and Complexity, 4(3), 20.

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