How Firms Respond to an Ethical Lapse: Does Going the Extra Mile Matter?

Abstract

A recently published article by Marshall Schminke (University of Central Florida), James Caldwell (Southeast Missouri State University), Maureen Ambrose (University of Central Florida), and Sean McMahon (University of Central Florida) provides a fresh perspective on ethical failures in organizations and initiates a line of research that will encourage new thinking about the impact of such lapses by organizations. To date, most organizational research has focused on how to prevent ethical violations and their often-catastrophic effects. And, for good reason: the effects are expensive in every sense of the word. As the article notes, workplace fraud in all its forms—from an employee pocketing $10 at a coffee shop to the fast-talking executive pulling off a multi-million dollar embezzlement scheme—is estimated to cost upwards of three-quarters of a trillion dollars in the U.S. alone (ACFE, 2012). Thus, the focus on prevention in the workplace is obviously a very worthy goal. Prevention is also important because ethical lapses can put a company’s reputation, if not its existence, at risk. Yet, these lapses continue at an alarming rate and are becoming more clever and complex all the time. If such violations are common— perhaps even inevitable—then another important managerial issue is how to deal with them once they occur. Specifi cally, there is very little work on the aftereffects of an ethical breech on employee morale and attitudes—especially those who have witnessed such acts. Given that nearly half of all U.S. workers report having personally witnessed violations of their fi rms’ ethical policies, it is a key issue that deserves attention. By focusing on the topic, Schminke and his colleagues provide insight into how fi rms and well-intentioned people can manage the recovery process to regain employee trust after an ethical lapse. Schminke and his colleagues used the service recovery literature in marketing as a possible platform for understanding recovery from ethical lapses. For example, they looked at how fi rms fi x customer problems, recover their loyalty, and keep their business, and asked whether similar strategies could help regain employee trust following an ethical lapse. The service recovery literature also shed light on what is often called the recovery paradox. This occurs when, say, a passenger arriving in London fi nds that her luggage is missing. If the airline manages to pull out all the stops and fi nd the bags in short order, the customer may end up feeling even greater loyalty to the fi rm and writing the airline President to describe how well she was treated. Schminke and his colleagues suggest an ethical recovery paradox may exist if fi rms go the extra mile to deal with an ethical violation in a highly effective way. Such actions could, therefore, restore and enhance employee confi dence and support. This is a provocative hypothesis with many important managerial implications—one that was tested in this research.