Corporate Scandals Increase Employee Turnover, Study Finds

Regulatory fines and penalties can reach into the billions of dollars, like they did when Abbott Laboratories was fined $1.6 billion for illegally marketing its drug Depakote; or when Goldman Sachs had to pay $3.3 billion for misleading investors; or when Occidental Petroleum was fined $5.5 billion for an environmental clean-up settlement. If you focus on these firms’ balance sheets, it appears they all just absorbed these penalties and moved on. But each of those cases had something else in common: in the aftermath of the scandals, huge numbers of employees voluntarily left for jobs at other companies without the same reputational stigma, costing the firms untold amounts in rehiring expenses and institutional knowledge.

Turnover After Scandal

That finding comes from a new study by Mark DesJardine, an associate professor of business administration and the Paul E. Raether T’73 Faculty Fellow at Tuck. In “Seeking Greener Pastures: Employee Turnover Following Corporate Stakeholder Violations,” a paper forthcoming in the Academy of Management Journal, DesJardine and his coauthor Forrest Briscoe of Cornell University show that when firms are punished for wrongdoing, it hurts not just their bottom line but also their reputation and often results in a spike in employee turnover. Specifically, they find that “violations amounting to 5 percent of a company’s annual revenues translate into a 3.93 percent increase in employee turnover,” they write. And turnover rates “rise further when violations are broad, rapid, or historically atypical.”

DesJardine and Briscoe embarked on this study to answer a question that hadn’t been examined before. The academic literature in organizational behavior has established that employees care about how their employer’s reputation reflects their own values, judgment and professional credibility. What had not been studied is whether employees would leave their job and find a new one in response to corporate wrongdoing. Access to a new dataset opened the way for this investigation. “There’s this new LinkedIn data you can get,” DesJardine says, “so we had really granular-level employee data where we could see where they worked and where they went after a scandal at their firm, and we had precise timing of their job change in relation to the regulatory violation.”

Seeking Cleaner Firms

Their study used data from 735 large U.S. firms between 2013 and 2020, comparing stakeholder violations—regulator-sanctioned acts of misconduct that harm non-shareholders and result in fines or penalties—to employee turnover. After countless rounds of data analysis and tests, they kept seeing the same effect: following regulatory penalties, people leave their job. “And what was most interesting to us wasn’t just the people at the top, as you might expect,” DesJardine says, “but it was throughout the organizational hierarchy.” Another of their favorite findings is that, as the “greener pastures” title of their paper implies, employees left for companies with cleaner histories of violations. “They weren’t going from, say, Exxon to BP,” DesJardine explains, “but joining other companies in the same industry without stakeholder violations in their recent history.” This suggests, they say, that turnover reflects “purposeful sorting rather than random mobility.” Employees went to firms where they didn’t have to worry about being stigmatized for working for a bad actor.

The Cost of Violations

If the regulatory fines weren’t expensive enough, the human resources costs only add to the bill. It is commonly estimated that it costs a firm 100 percent of a worker’s salary to replace that worker, without factoring in the loss of institutional knowledge. For a representative firm in their sample, they found that violations amounting to 5 percent of annual revenue imply up to $10 million in replacement costs.

For DesJardine, the managerial implications of the paper are clear: stakeholder violations cost firms dollars and, more importantly, human capital, so firms should put systems and procedures in place to guard against them. “Employee retention can advance a company’s competitive edge and overall performance,” they write. Stakeholder violations don’t just damage a firm’s reputation—they quietly change who wants to work there. When actions fall out of sync with stated values, employees take note, and many respond by looking elsewhere.