Master Thesis: International Business and Management (MSc)

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Master Thesis:

International Business and Management (MSc)

Unethical Organizational Behavior & The Role of Social Media

on Reputational Risk – A consumer perception

By

Fatma Gül Polat

S2646633

First Supervisor : Sanne N. Ponsioen Co- Assesor : Gjalt de Jong

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ABSTRACT

This research was designed to test a possible relationship between unethical organizational behavior and reputational risk as perceived by the customer, as well as the possible influence of social media in the case of unethical events. It was hypothesized that an organization that is involved in unethical events will have a higher probability of reputational risk than a neutral organization in the eye of the consumer. Further, it was hypothesized that an unethical event occurring in an organization within a social media environment will have a higher risk of losing its reputation than an organization in the same situation, but which is isolated from social media. The hypotheses were examined within a scenario analysis where neutral behavior, unethical behavior and unethical behavior within a social media setting, was manipulated. Respondents were asked to indicate, whether they saw the organization as engaged in an unethical event or not, and if the action of the company was spread in the social media or not. Support for the first effect, that unethical behavior increases the reputational risk, was provided. However, the second hypothesis was rejected. There was not a significant difference between an unethical organization in an isolated setting and an unethical business operation within a social media environment. Possible explanations for the results were discussed, as well as the theoretical and managerial implications, limitations and the propositions for future research.

Key words: reputational risk, unethical organizational behavior, social media, customer perception

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T

ABLE OF

C

ONTENTS

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I. Introduction 1

II. Literature Review 5

1. Reputational Risk 5

2. Organizational Behavior 8

3. Social Media 11

III Methodology 11

1. General Information About Participants and Design 16

2. Procedure 17

3. Measurements And Manipulations 18

IV. Data Analysis & Result 19

V. Discussion 21

1. Theoretical Implication 22

2. Managerial Implication 24

3. Limitation & Further Research 26

4. Conclusion 28

VI. References 29

APPENDIX A 36

APPENDIX B 37

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Master Thesis 1

I. Introduction

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”—Warren Buffett (Huffington Post, 2013)

The above quote of Warren Buffett is a brief acknowledgment of how easy the reputation of a single person or an organization can be damaged and how it can have disastrous consequences. Moreover, it exemplifies that if companies would consider the effects of their actions, their behavior of implementing certain business practices would be done “differently”.

Reputation is one of the most important intangible assets available to any company and a resource that can lead a company to a competitive advantage (Aula, 2010, Barney, 1991; Hall, 1992). This is related to the facts that, for instance, a good reputation can increase the reliability of the company´s investors as well as attract its stakeholders (Fombrun, 1996; Walker, 2010, Young & Hasler, 2010).

In today’s world, where globalization takes over and the dissemination of information gets easier, and where the practices of organizations and the awareness of consumers become more important, damaging a company´s reputation is becoming simpler than ever. Referring to a study by the World Economic Forum (2012), on average, more than 25% of a company´s market value is related to its reputation. Therefore, building a good reputation and the effort to not lose it, is one of the hardest and most challenging tasks a company and its management has to contend with. The global survey on reputation by Deloitte (2014) that interviewed 300 executives from different industries, demonstrates the importance of reputation. For example, 88% of the executives indicated that they focus on reputation risk as a “key business challenge”.

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F.G. Polat 2 the fear it created damaged the company reputation and caused the market shares to fall from 37% to 7% (Rehak, 2002; Floreddu et al., 2014).

In this thesis however, I will study the impact of unethical behavior on reputational risk. Within this context, one can consider the case of WorldCom, which was confronted with a huge reputational risk related to financial fraud and ethical mistreatment (Tran, 2002). Besides WorldCom, the last decade was shaped by many other scandals, which were raised by unethical behaviors as it happened in companies like Foxconn, Primark or Zara. For example, Zara is one of the most celebrated Spanish fashion retailers and belongs to one of the world's largest multinational clothing companies Inditex, with Amancio Ortega (the second richest man in the world) as its owner (Loeb, 2015). Once Zara was seen as “pioneer of the fashion industry” while producing high quality products for reasonable prices in Spain and not in emerging markets like China or India via cheap suppliers (Tokatli, 2007). According to Forbes Magazine (Antunes, 2011), Zara´s factory plant in Brazil treated its workers with “slave-labor working conditions” and extremely low wages.

Companies are held responsible for everything that happens in their global supply chain, and they are more involved in activities that go beyond their borders (Gereffi et al., 2005; Ristucca & Rossen, 2015). Therefore, ethical behaviors of organizations and the aim to conduct corporate social responsibility initiatives can effect the reputation. Everything that is happening in their entire value chain, from the cotton contractor to the manufacturing plants in developing countries, the companies have to make sure that unethical mistreatment is not occurring. Consequently, it is important to have high safety standards and good working conditions to secure the value-chain, in which, no unethical scandals can happen. As Warren Buffet mentioned, all the efforts of creating a good reputation can be destroyed within a couple of minutes if something goes wrong: for example, at one of the facilities of the suppliers.

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Master Thesis 3 about a particular organization. For businesses, the technology allows collaboration with partners all around the world and simplifies the informational flow between the partners, as well as between consumers. What was not possible one decade ago is now feasible: publishing information, spreading it very quickly throughout different countries and reaching a large number of individuals, is nowadays, a common activity. The age of transparency has reached the world. Thus, “social media represents a new social space where professional reputations can be built and destroyed” (Ollier-Malaterre & Rothbard, 2014). Businesses are confronted with scrutiny by the general public so social media can have two different sides. On the one side, it can represent a tool where companies can build and improve their reputation by interacting with their customers via different social media platforms, such as Facebook or Twitter and staying present. On the other side, social media can be a deadly penalty for organizations, due to the fact that communication knows no boundaries anymore. For instance, a negative event occurring because of unethical behavior might not just raise undesirable headlines. Moreover, it can also destroy the trust of the shareholder, especially the trust of the customer and lead to a decrease in consumer loyalty (Bendixen & Abratt, 2007; Fombrun & Shanley 1990). As such, one unethical event can raise the attention of the network users and can be spread within seconds on the different social networking side.

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F.G. Polat 4 How does unethical organizational behavior influence the reputation of an organization,

as perceived by the customer? What is the social media role (absence or presence) concerning of an unethical event, and how does this effect the reputational risk of that

organization?

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Master Thesis 5

II. Literature Review

1. Reputational Risk

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Reputation is defined as “beliefs and opinions that are generally held about someone or something” and are known to be an important intangible asset for companies (Davies et al., 2010; Hall, 1992, Oxford Dictionary, 2015). It is an intangible asset because of the “belonging” to a particular brand or organization, as well as the connection to the specific organizational culture. Nevertheless, it is not a property right “which can be bought and sold”, as it is not embedded in a legal framework (Hall, 1992). However, it influences the competitiveness, financial performance and social status.

As mentioned in the introduction, 25% of a company’s value is generated from its own reputation and it is a significant provider for the company’s success and consequently should be a part of the corporate strategy (Deloitte, 2014; Hall, 1992). Additionally, a good reputation can lead to a sustainable competitive advantage, and the organization can charge premium prices to its customers and have lower marketing costs (Fombrun, 1996; Walker, 2010).

Generally, the process of organizational reputation is a simple concept. A company becomes well known over a significant period of time. It can be criticized and judged by others for good or bad actions. In other words, over time, a reputation can change and influence the relationship between its shareholders and stakeholders (Lee et al., 2011). The reputation that a business owns is signaling how its attitude is compared to its competitor and presents the collective judgment of its environment (Fombrun & Shanley 1990). A good reputation of an organization should signal to its customer “credibility, reliability, trustworthiness and responsibility” (Fombrun, 1996). Therefore, a firms corporate reputation can be defined as a cumulative representation of its past actions and future activities (Fombrun, 2012; Fombrun, 1996).

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F.G. Polat 6 the media can be important, as it creates a bridge for stakeholder’s to possibly reduce uncertainty regarding the organization (Deephouse, 2000; Fombrun, 1996; Fombrun & Shanley, 1990). Relying on the report by Deloitte (2014), the opinion of a company´s customer (main stakeholder) can influence the revenues and profits.

The probability or vulnerability of losing one’s reputation is called reputation risk (Aula, 2010). The survey by Deloitte (2014) denotes that 87% “of executives rate reputational risk as more important than other strategic risks”. Furthermore, companies are becoming more afraid of risks in which they are indirectly involved and cannot explicitly control, for example; the human abuses that can happen at their suppliers manufacturing plants.

When talking about reputational risk, we have to consider different dimensions such as security, financial performance, quality of product and/ or services, corporate social responsibility and ethics (Ristuccia & Rossen, 2015; Deloitte, 2014). In this study, the focus will be about reputational risk based on ethical behavior. Evidently, for European firms, corporate ethics are a main driver of reputational risk by 61% (Deloitte, 2014).

Recovering from a harmful reputation can sometimes be more challenging than expected. Research shows that companies that faced a negative reputation, indicated losses of about 41% of their brand value (Deloitte, 2014). Also, the research by Baumeister et al. (2001), described the fact that “the coverage of negative issues and phenomena exceeded positive, good ones 69% to 31%”. This means that people are more sensitive regarding negative actions, while they are more neutral to positive ones. Further in the research by Baumeister et al. (2010), it is implied that once the human behavior is stereotyped and categorized, it will be hard to lose it. When a person has experienced an undesirable situation or event, a negative reputation will easily appear. On the contrary, “good reputations are difficult to acquire but easy to lose” (Ollier-Malaterre & Rothbard, 2014).

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Master Thesis 7 uncertainty and shape future behaviors of customers and employees in a negative way (Chun, 2005; Fombrun 1996; Fombrun & Shanley 1990). This means that a company signals the general public with its corporate ethics, the firms strategy, prospects, as well as what its attitude against unethical behavior is (Boulding & Kirmani, 1993; Davies et al., 2010; Fombrun & Shanley 1990).

Signaling: Signals “carry information persistently in equilibrium from seller to buyer, or more generally from those with more to those with less information” (Spence, 2002). As such, the signaling theory can be taken into consideration. It is developed from the information asymmetry that can appear between two or more parties (Spence, 2002), when accurate and trustworthy hidden qualities of the signaler (seller) are hard to monitor for the receiver (buyer) (Spence, 1974; Stiglitz, 2000). Therefore, a signal of a business can shape the opinions of its observer, for instance, its consumers with the information that appears in public. Hence, there are attributes that cannot be observed before purchasing a product or service, such as quality or durability. The seller can acquire the knowledge that the company publicizes to its environment, which can be, among others, the reputations. Consequently, the attitudes of a business and how it is acting toward its counter partners can send a particular signal to its consumers. These can be positive or negative, likewise it can be an indicator of how reliable and trustworthy that company is (Nguyen & Leblanc, 2001). As trust is a basic component to build a long-term and sustainable relationship with the customer; negative signals can have a harmful impact on the reputation and raise the reputational risk. This is related to the fact that the information asymmetry that occurs between the organization and its customer spreads the gap between the information that reaches the customer (information with negative content which shapes the reputation, such an unethical event) and the hidden information that the company carries (e.g. quality of the product, design and so on).

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F.G. Polat 8

2. Organizational Behavior

Up to now, previous literature studied various explanatory variables for reputational risk and among others, the behavior and actions of organizations. Researchers, who focused on the causes of reputational risk based on unethical behaviors, stated that organizational behavior might influence the particular reputation in the eyes of its observer, for instance, its customers. Obviously, decision-making will always pose a dilemma for organizations. When shareholders and stakeholders are in ambiguous conditions, decision-making becomes difficult. On the one hand, a company’s purpose is to maximize its welfare, and on the other hand, it has to satisfy their consumers (Buckley et al., 1998; Treviňo, 1986). Topics like maximizing profits, safety, health and comfort of others, can lead to challenging decision-making for the management and this in turn can cause ethical dilemmas. Consequently the topic regarding ethical decision-making, especially unethical behavior, will always be present. From an extended perspective, unethical behavior can have a powerful negative impact on the overall performance of the organizations. In this thesis I will study the reputational risk, which arises from unethical organizational behavior.

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Master Thesis 9 internal factors, e.g. decreased performances or pressure, can play a significant role while making judgments (Baucus & Near, 1991). Keeping in mind the explained studies, within this thesis, I will define unethical behavior for organizations as a behavior of organizations that help to achieve organizational goals while harming others, shaped by inequality, prejudice and abuse (e.g. human rights, cheating), and which is unacceptable for the majority of consumers (Baucus & Near, 1991; Haidt & Joseph, 2004; O´Fallon & Butterflied, 2005; Trevino, 2004).

Firms are shifting their production stages more and more to developing countries, such as China, India or Bangladesh, as these countries have built a huge, cheap labor pool that is willing to work in inhuman and unsafe working conditions to earn money (Payaud, 2014). Additionally, the increase of technological developments and reduction in transportation costs have allowed businesses to move their assembly to far away countries, to increase the value-adding of their manufacturing processes (Baldwin, 2006; Gereffi et al., 2005). This shift has built multifarious network structures and has made the decision-making regarding ethical actions, for example human abuse such as child labor and overtime, harder than ever.

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F.G. Polat 10 important. Nevertheless, a lot of MNEs struggle with it. As an example, the famous footwear brand Nike can be given. At the end of the 90s, they had “become synonymous with slave wages, forced overtime, and arbitrary abuse”, mostly because of not placing ethics as a priority (Merk, 2011). Nowadays, they changed their polices by embedding strong corporate social responsibility aspects and sending inspectors to perform inspections regarding all working conditions of their suppliers.

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Master Thesis 11 organization can feel bad about buying that organization´s product/service after an unethical event of an organization, and that the reputation is related to the representation of its past action and on what people say or think about a company, the following hypothesis arises:

Hypothesis 1: Reputational risk, as perceived by the customer, is larger when an organization is engaged in unethical events, as opposed to when an organization is not involved in unethical events.

3. Social Media

Unethical behavior of organizations is an issue that most businesses have to deal with, since it might lead to a decline in reputation. Obviously, there are other factors that might have a sincere impact to the reputational risk. The awareness of the consumer is growing more; the more the technological development increases. Companies now have to be more conscious of their ethical activities, since nowadays it is possible that customers can access all kinds of company´s information on search engines such as Google via the Internet. In other words, the world is becoming more transparent and sweeping problems under the carpet, e.g. unethical events, are often not possible anymore. Therefore, within this thesis the impact of social media related to this topic will be studied.

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F.G. Polat 12 would be bigger than China or India.

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Master Thesis 13 The possibility of creating a movement in all types of areas increases the impact of social media for organizations and changes the setting of businesses. It creates opportunities for industries to reach new customers, develop new marketing channels, recognize competitors and build brand awareness. According to a survey by Rapp et al. (2012) 88.2% of the companies started to use social media as an alternative for former advertisement venues such as TV and magazines, and approximately 40% of these firms “fully adapted social media into their business strategies”. Social platforms like Facebook, Twitter, Instagram or even LinkedIn help organizations to empower relationships between and with their consumers.

As I focus in this thesis on unethical organizational behavior, this would mean that unethical treatment or recall of products has become accessible to people in the most far away countries and this will raise the electrical World-of-Mouth (eWOM) communication. Hennig-Thurau, et al. (2004) defines eWOM as ‘‘any positive or negative statement made by potential, actual, or former customers about a product or company, which is made available to a multitude of people and institutions via the Internet’’. The traditional word-of-mouth literature, which was researched before the increase of the social networks, revealed that it has a key role in the decision making process of customers. With the rise of the Internet, eWOM enables the consumer a broader perspective for sharing and collecting information (Hennig-Thurau, et al., 2004). To explain why people are sharing more on the Internet, the social capital theory can be invoked. The social capital theory explains that sharing information and helping others and therefore, having the feeling of satisfaction, increases the social capital on several internet platforms and can also be seen as a human manner to feel “good” (Lee et al., 2011; Lee et al., 2012; Warren et al., 2014). Since this, all kinds of distribution channels have been defined as a part of the social system (Rapp et al., 2012).

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F.G. Polat 14 Internet (Pavitt, 2012). An example of this would be the case of when H&M went viral and raised the attention of its customers. H&M is a Swedish MNE in the fashion industry that struggled with scandals in developing countries, such as being involved in child labor rumors and burning factories. Referring to Doward (2012), they used cotton from Uzbekistan, a country known for abusing children at the age of nine, to work in cotton fields. Moreover, H&M was linked more than once in a scandal, where production factories in developing countries burned as a result of ineffective safety regulations and this caused the death of hundreds of workers (Ahmed, F., 2012; Hickman, M., 2010). In this case, social media allowed people to inform themselves about this scandal by reading the articles on the different web pages, watching videos that were published. Moreover, people were confronted on their own social media sites with a lot of information. The fact that people can now directly access any information they want has made them more aware of topics particularly related to unethical activities.

Another well-known example to describe this point is the collapse of the manufacturing plant “Rana Plaza” in Bangladesh. Two years ago, the garment-factory collapsed and caused the death of more than 1,100 workers. This factory was a supplier of the prominent fashion retailers such as Primark, Mango, Benetton and Wal-Mart (Butler, 2013; Thomasso, 2013). In the aftermath, this event raised the pressure for retailers to pay compensation and admit their mistake. Furthermore, huge viral campaigns arouse to support “clean clothing” and safer and more secure working conditions for workers. With the help of the social media, a fund was set up to compensate the victims and a petition campaign (Avaaz) was created to start movements against inhuman working conditions in the garment industry (Avaaz, 2015; Butler & Burker, 2015). The awareness by the consumer and the publicity, significantly supported by social media, has put a huge amount of pressure on the companies that were involved and has started protests and campaigns for “ethical fashion” (Butler & Burker, 2015).

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Master Thesis 15 active users rise on the network, the value of the shared knowledge accumulates exponentially, e.g. “If there are 10 people in a social net the power of the structure is 102 or 100. If the number is (..) increased by simply one member, the power now becomes 112 or 121” (Davies et al., 2010). In other words, organizations have to know that its operations and practices are becoming easily observable and their unethical behavior can effect, for example, their reputation and increase the risk of losing it.

As mentioned in the beginning, Web 2.0 has realized easy access and a simple distribution of information. Additionally, an enormous number of network users leads to the aspect that the privacy of public organizations have become more vulnerable than ever. In the past, the impact of the word-of-mouth was not as extensive as now (Hennig-Thurau, et al., 2004). People could exchange information with the people next to them, acquire knowledge and get information from newspapers, radio and television. Therefore, companies could easily control the information flow. Obviously, it was not hard for company management to handle reputational risk, as the customers could not easily access information when some unethical activities occurred. On the contrary, the 21st century offers immense information flow via the Internet and eWOM allows customers from all around the world to share their experiences or new information. Social media has become an authentic tool that can publish events, among others, and unethical activities in real time. Businesses are no more in charge of the information and cannot control negative content. When an organization is involved in an unethical event, it is likely that this will reach thousands of network users, who might be their customer, in a short period of time, as the example of Rana Plaza has demonstrated. Subsequently, this leads to the second hypothesis:

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F.G. Polat 16

III Methodology

1. General Information About Participants and Design

To gather the needed data, I created a scenario analysis. Three different scenarios were developed and implemented in an online survey. To establish the online survey I used Qualtrics, which is the industry-leading provider of Online Survey Software, helping to create an online questionnaire and collect data. The intention of selecting an online survey was that it offered easier access to participants via E-Mail and different social media platforms such as Facebook. Additionally, it was delegated in a social media environment for the reason that it would be easier for the participants to imagine themselves in the scenario with the social media influence.

The survey was on a voluntarily basis and it was fully anonymous. The link, including the questionnaire, was posted on several social media platforms or was sent to selected individuals via mail, so that the participants could decide if they wanted to take part in it or not.

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Master Thesis 17

2. Procedure

The people who decided to take part in the survey had to click the link to start the survey. As soon as the participants did that, they were presented with a brief introduction, which explained the reason for conducting the questionnaire: a master's student who was collecting data for her thesis. After clicking the “Next” button, one of the three conditions were randomly chosen by Qualtrics and shown to the respondent.

In all three cases, a situation was described, in which the participants had to buy a new pair of jeans and usually were customers of the brand “Black2Blue Jeans”. However, the retail market was more competitive. In all three situations, the virtual company Black2Blue Jeans was embedded in a different environmental setting.

Subsequently, the neutral condition was about the fact that Black2Blue Jeans was a neutral company. The participants were just shown that Balck2Blue was working in a fierce market. They could create the opinion of a regular retailer, which was not linked with unethical mistreatment and not set in a social media environment.

In the condition with unethical behavior, Black2Blue Jeans was involved in unethical events against their employees in Bangladesh, which lead to a single article in the newspaper. The attendees would get the feeling that the retailer in the second scenario was acting against the norms and therefore was punished by the newspapers. Hence, the newspaper just published one article. Same as in the first scenario, under the condition social media was not involved.

The last condition was about unethical behavior set in a social media environment that explained the same unethical activities of the firm, as mentioned in the second condition, with the difference that social media was involved and the unethical treatment was spread on different social networking sites. The participants would be aware of the unethical behavior of the company and grasp the intention that they were confronted with this event on many different social media platforms.

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F.G. Polat 18 and a check of company´s reputation, including two questions for a manipulation check. Following this, the participants were asked a couple of questions about their social media usage. The survey finished with demographic questions such as gender, age and occasion and closed with a thanks to the respondents.

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3. Measurements And Manipulations

Unethical business behavior

The dependent variable was measured with the question: “Now, you are going to buy you jeans. You go to a big shopping mall where you have a wide range of different retailers. Also, you can find Black2Blue Jeans there. What are you going to do? Are you going to Black2Blue Jeans to buy you a pair of new jeans?”

The possible answers were on a 4-point Likert scale, (a psychometric scale involved in research that uses questionnaires) ranging from 1 “I will definitely not buy a jean from Black2Blue Jeans“ to 4 “I will definitely buy a jean from Black2Blue Jeans”. This 4-point Likert scale forced the participants to make a clear decision.

Manipulation Check

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IV. Data Analysis & Result

In order to test the two hypotheses, a one-way analysis of variances (ANOVA) was conducted as a main statistical method.

Manipulation Check:

The first manipulation check was tested with the question “In the scenario I read, Black2Blue Jeans is not be linked to any unethical event”. It was created to find out if participants are distinguishing organizations that are neutral or participate in unethical events. Indeed, there was a significant effect that respondents acknowledged unethical activities, F (2.92)= 8.866, p<.001. A post hoc test showed that participants were more likely to recognize organizations that were linked in unethical activities under both conditions, without social media influence (M=2.47, SD=1.167, p<.001) and within a social media setting, (M=2.17, SD=1,124, p<.001) were more than organizations that were not associated with unethical mistreatment (M=3.29, SD=0.854).

--Table 1, Table 2 and Table 3 about here--

The second manipulation check was examined by asking, “In the scenario I read, the unethical actions of Black2 Blue Jeans are wide spread in the social media and raise high attention”. It should determine that participants were aware of the condition of a social media environment and an environment that is isolated from social media when unethical behavior exists. Therefore, here the one-way ANOVA was created between conditions 2 and 3. Participants recognized the influence of unethical behavior within a social media environment (M=3.91, SD=0.78) significantly more than unethical behavior that was set in isolated circumstances (M=2.90, SD=1,13) (F (1,65)=18.23, p<.001). Participants recognized the influence of unethical behavior due to the social media being stronger (MD=3.91; SD=0.781).

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F.G. Polat 20 To test hypothesis 1 “Reputational risk, as perceived by the customer, is larger when an organization is engaged in unethical events, as opposed to when an organization is not involved in unethical events.”, a one-way ANOVA only between the neutral condition and the unethical behavior condition was guided. In fact, there is a significant difference in unethical behavior regarding an reputational risk, F(1.57)=10.90, p<.001. On average, a neutral organization has a lower risk of damage to its name (M=2.96, SD=0.64) than an organization involved in an unethical event (M=2.33, SD=0.80). Therefore, hypothesis 1 was supported.

---Insert Table 6 and Table 7 about here---

In order to examine hypothesis 2, “Reputational risk, as perceived by the customer, is larger when the unethical event is accompanied by social media attention, as opposed to when an unethical event occurs in isolation from the social media.”, again a one-way ANOVA, but this time, between unethical conditions with and without social media environment was directed. In this ANOVA the neutral organization-condition was excluded. The result table (Table 5) indicated that respondents were not less likely to buy jeans in the case of an unethical event without social media (M=2.33, SD=.80) than in the case of an unethical event with social media (M=2.23, SD=.84). The one-way analysis of variance indicated that a social media environment is not directly a predictor of a higher degree of reputational risk (F (1.64) = 0.26, p = .61). Therefore, hypothesis 2 was rejected.

---Insert Table 8 and Table 9 about here--

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V. Discussion

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The aim of this paper was to answer the research question “How does unethical organizational behavior influence the reputation of an organization, as perceived by the customer? What is the social media role (absence or presence) concerning of an unethical event, and how does this effect the reputational risk of that organization?”

It was argued that unethical behavior within an organization can raise the awareness of the consumer regarding its reputation, and this relationship can increase when social media is involved.

Generally, the topic about the perception of the consumer regarding unethical organizational behavior and the impact of the reputational risk has been emphasized by several scholars (Buckley et al., 1998; Merk, 2011; O´Fallon & Butterflied, 2005; Trevino, 1986). Hence, the raise of social media and its influence on the consumer, has been investigated narrowly (Davies et al., 2010; Gensler et al., 2013; Pavitt, 2012). However, to my realization, the role of social media and its influence while an unethical event within an organization is happening has not been examined before. Actually, building a connection between consumer perception in an unethical business environment and the effect of social media presents a new medium that is gaining more power and could meet a current research gap and lead to theoretical and practical recommendations for future researches.

The following quantitative analysis in the form of a one-way ANOVA provided significant support for hypothesis 1, but rejected hypothesis 2. Indeed, there was a strong effect of unethical behavior projected on the consumer, however the influence of social media was not significantly provided. Despite the fact that the participants of the survey realized that an unethical action within a social media setting was more widespread than an organization without any social media influence (Manipulation Check II), no further impact of social media was found.

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F.G. Polat 22

1. Theoretical Implication

Previous research has shown that an unethical organizations behavior can have an essential impact on their reputation (Fombrun, 1996; Deloitte, 2014; Hall 1992). The results in this thesis are in line with the literature that unethical events, in general, raise the risk of losing a good company reputation. Within the context of this study, the reputational risk was observed as a perceptual representation where an unethical organizational activity had occurred. Indeed, consumers will react by not buying and identify the organization as not having ethical practices. This finding adds to the discovery that the customers negative impact of organizational behavior, might lead indirectly to pressure on organizations to act more responsible in their entire value chain. Consumers build a particular image of an organization in their minds. When this is destroyed, due to unethical events appearing in the public, the loyalty and trust will decrease. The consumers opinions regarding that particular company will change and will lead to a loss in the reputation (Chun, 2005; Nguyen & Leblanc, 2001). Therefore, the overall performance of the company might decline (Deloitte, 2014). As Fombrun (1996) mentioned, “good reputation can create wealth” so in turn bad or a damaged reputation might destroy a company´s fortune. Hence, this finding was not exactly new. The reputational risk is known by executives to be one of the most important risks, especially when the ethics or morals of the company can shape the possibility of forfeiting it (Ristucci & Rossen, 2015; Deloitte, 2014). Fundamental ethical behavior of an organization protects corporate reputation, which creates customer loyalty, and this is demonstrated in this thesis.

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Master Thesis 23 unethical activity was brought to attention because of the Internet. However, the result of the one-way analysis of the variance indicated that unethical organizational behavior within a social media setting does not significantly increase the reputational risk of that company, compared to an organization with an absence of social media. Not supporting the increasing importance of social media on the corporate reputation can be attributed to the measurement of the consumer opinion as extremely complex.

The traditional word-of-mouth literature indicated that consumer attitudes are shaped by word-of-mouth communication, so that the eWOM should widen the gathering of information (Henning-Thurau et al., 2004). ). Therefore, the expectation was that it would increase the reputational risk, due to eWOM. Nevertheless, Web 2.0 also contains false and biased information; people can be more critical about a particular content that is published (Reichelt et al., 2013). The difference in people’s characteristics such as moral identity, educational background and personal experience, can shape the usage of social media and change the degree of the awareness about the unethical events appearing at several social networking sites. In particular, the educational background can increase the critical judgment of information appearing on social media. Critical thinking has become an essential part of higher education (Dyck et al., 2012). Students or academicians are more likely not to accept the opinions of others, so they would not be likely to trust all information on the Internet.

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F.G. Polat 24

2. Managerial Implication

This study indicates that reputational risk is significantly interacting with unethical organizational behavior, and that consumer can be negatively influenced by it. Hence this thesis does not provide evidence for the influence of social media regarding reputational risk.

Companies like Apple, Google, Coca Cola or Walt Disney not only have just high market shares, but they are also some of the most trustworthy companies (Adams, 2015) due to reputations that is “good as gold” (Fombrun, 1996). Therefore, managers always have to consider their ethical decision-making while they are, for example, implementing a new strategy or contracting new suppliers. Especially while implementing a strategy and consequently aiming to generate competitive advantage, assets play an important role (Barney, 1991). As reputation is one of the most important intangible assets (Davies et al., 2010; Hall 1992) this finding can be considered to be used to empower the corporate strategy, to provide a sustainable competitive advantage for organizations (Fombrun, 1996). Firm’s intangible resources are hard to imitate for their competitor and might strengthen their strategy while providing a unique source to gain competitive advantage. In turn, an excellent corporate reputation will provide not only a valuable brand name, but it also will allow the company to charge premium prices to its customers, have decreased marketing cost and increase consumer loyalty (Chun, 2005; Fombrun & Shanley, 1990; Fombrun, 1996).

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Master Thesis 25 market value due to a high degree of reputational damage, leading to the mistrust of the customer. Hence, thirty years later and after huge advertising campaigns, interactive communication with its customers and the high degree of social responsibility (Fombrun, 1996; Rehak, 2002), Johnson & Johnson is, according to the Forbes Magazine (Adams, 2015) nowadays, the 19th_{most “reputational company”. Their active}

steps during the scandal lead to sympathy and increased the consumer trust (Fombrun, 1996). Therefore, organizations should work actively against a damaging event if it is occurring, so that attention should be on the communication channels. Three steps can be taken into account by companies to work against reputational risk.

First, to provide a good reputation and decrease the reputational risk, social media should be taken into account. If there was no support for a greater influence in reputational risk when an unethical scandal appeared, the social media can, in general, increase the opportunities to work actively against any negative headline that could harm the reputation. Company owned social networking sites and pages are a way to stay constantly in touch with their consumer. As such, the awareness of the unethical behavior as perceived by the customer is higher when social media is involved. There is an increasing need to be more conscious, as a company and as the management team, to be trained in case an unethical event is appearing in the social media. The usage of social media and implementing it at the corporate strategy could be one suggestion. Second, this study suggests that an unethical occasion, especially at the supply chain of an MNE can get greater recognition via the Internet, as the example of H&M demonstrated. Therefore, interconnecting with the supplier can foster a better flow of information, as well as build confidence between supplier and MNE, so that unethical behavior along the value chain can be reduced. Moreover, it can lead to a condensed network structure and the MNE can have more control over the supplier’s facility (Vurro et al., 2009).

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F.G. Polat 26 conditions, no use of child labor and excessive working hours, as well as adequate wages (Jiang, 2009). These codes of conduct, can be shown as a “transparent” way of doing business on the web page of the organizations, to make aware that customers acknowledge the fact that the company is working ethically appropriate. With an effective corporate communication strategy, a company can actively bridge the gap between their business and the customer (Aula, 2010).

3. Limitation & Further Research

As in all research, there are also some limitations in this thesis that have to be considered.

First of all, this study examined self-reported responses according to unethical behavior and how the spectator observes it. There is the limitation that even if the responses are anonymous, there will be the tendency of choosing a different answer than the participants would generally not select. In this study, it could be for the reason that the survey for this research was predominantly published through different social media account on Facebook (my own, several friends and different groups on Facebook). As such, the people who are familiar with me would not feel anonymous anymore.

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Master Thesis 27 examined to anticipate a bias.

Third, this research used a homogeneous and small sample size (93 people). Moreover, most of the participants were students (73%) and of a younger age (average age of 25). This can easily show a bias in the answer choices, as young people, especially students, are more likely to use the Internet and it is more probable that using the social media is a normal circumstance. The younger generation is growing up with the possibility that all new information, event or scandal is available due to the Web 2.0 (Becker & Nobre, 2014). To collect more reliable data, a broader study with a larger number of participants across a more heterogeneous group could be conducted. This could be including different age groups, professions, life experiences, cultural and educational differences (demographics).

Finally, another weakness of the survey was that it was conducted in English and most of the participants were not native speakers. This could also influence the degree of understanding of the scenarios and questions.

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F.G. Polat 28

4. Conclusion

The goal of this research was to examine whether or not unethical organizational behavior can influence the consumer and so in turn, reduce the reputational risk. Additionally, it observed the influence of social media regarding the perception of the consumer and if there is a higher degree of reputational risk when the Internet is involved.

The importance of the relationship between unethical organizational behavior and reputational risk in our age of transparency due to the upraise of the Internet, is becoming more influential and dominant for organizations as well as researchers. Therefore, the compulsion of studying this topic is of an increasing importance to all, as it is reshaping our world.

As at the introduction quoted Warren Buffett stated that acquiring a good reputation is hard, but losing it is quite easy. This was also presented at this research. This study shows compelling evidence that an unethical event would lead to a decline in reputation due to the fact that the consumer would purchase less products or services. Hence, there was no indication that social media will significantly increase the reputational risk of an organization compared to one which has an absence of social media. However, the recognition of an unethical event was higher due to the Internet. This indicates that there is a new form of mass media occurring in which further research will be needed.

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APPENDIX B

! ! ! 0 0,5 1 1,5 2 2,5 3 3,5

neutral behavior unethical behavior Conditions

Figure 1. Levels of different organizational behavior in an isolated social media environment

Me an s of C on su me r Pe rse pt io n 0 0,5 1 1,5 2 2,5

without social media with social media Figure 2. Level of unethical organizational behavior in

different environmental settings

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F.G. Polat 38

Table 1. Descriptive statistics: Manipulation Check I: In the scenario I read, Black2Blue

Jeans is not linked to any unethical event.

Conditions N M SD

Condition 1: neutral

organizational behavior without social media influence

28 3.29 0.854

Condition 2: unethical behavior

without social media influence

30 2.47 1.167

with social media environment

35 2.17 1.124

Total 93 2.60 1.153

Table 2. One-way ANOVA: Manipulation Check I: In the scenario I read, Black2Blue

Jeans is not linked to any unethical event.

Sum of Squares df MS F P*

Between Groups 20.127 2 10.064 8.866 0,000

Within Groups 102.152 90 1.135

Total 122.280 92

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Table 3. Post Hoc Test for Manipulation Check I

Conditions Relation to other condition MD Std. Error P*

Condition 1 Condition 2 Condition 3 0.819 1.114 0.280 0.270 0.004 0.000 Condition 2 Condition 1 Condition 3 -0.819 0.295 0.289 0.265 0.004 0.268 Condition 3 Condition 1 Condition 2 -1.114 -0.295 0.270 0.265 0.000 0.268

Table 4. Descriptive statistics: Manipulation Check II: In the scenario I read, the

unethical actions of Black2Blue Jeans are wide spread in the social media and raise high attention.

30 2.90 1.125

35 3.91 0.781

Total 65 3.45 1.079

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F.G. Polat 40

Table 5. One-way ANOVA: Manipulation Check II: In the scenario I read, the

unethical actions of Black2Blue Jeans are wide spread in the social media and raise high attention. Sum of Squares df MS F P* Between Groups 16,619 1 16,619 18,226 0,000 Within Groups 57,443 63 0,912 Total 74,062 64 Significant if *p < .05

Table 6. Descriptive statistics for neutral and unethical organizational behavior without a

social media setting

Condition1: neutral

organizational behavior without social media influence

28 2,96 0,120

30 2,33 0.146

Total 58 2,64 0,103

Table 7. One-way ANOVA of neutral and unethical organizational behavior without a

Sum of Squares df MS F P*

Between Groups 5,766 1 5,766 10,896 0,02

Within Groups 29,631 56 0,529

Total 35,397 57

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Table 8. Descriptive statistics for unethical organizational behavior without and within a

30 2,33 0,802

35 2,23 0,843

Total 65 2,28 0,820

Table 9. One-way ANOVA for unethical organizational behavior without and within a

Sum of Squares df MS F P*

Between Groups 0,177 1 0,177 0,261 0,611

Within Groups 42,838 63 0,680

Total 43,015 64

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F.G. Polat 42

APPENDIX C

Scenario I: neutral & no social media:

You are a customer of a famous fashion retailer “Black2Blue Jeans”. Until now, you have always bought your jeans from the Black2Blue Jeans. Their jeans are known for having a high quality, being fashionable and tailored perfectly. The company is very successful. However, the retail market becomes more competitive than ever. Consequently, to overcome the pressure of the competitors they have to find ways to reduce cost. Currently, you need to buy a new pair of jeans.

Scenario analysis II: unethical behavior & no social media

You are a customer of a famous fashion retailer “Black2Blue Jeans”. Until now, you have always bought your jeans from Black2Blue Jeans. Their jeans are known for having a high quality, being fashionable and tailored perfectly. The company is very successful. However, the retail market becomes more competitive than ever. Consequently, to overcome the pressure, they have to find different ways to reduce cost. Therefore, they decide to re-allocate some of their manufacturing plants in places that are known for child labor, unsafe working conditions, 60 working hours per week in average and low wages. You saw a small newspaper article about the Black2Blue Jeans with the headline: “Black2Blue Jeans Scandal in Bangladesh: Child labor and women abuse!”. You were in rush, so that you could not read the whole article. In the days after, no more information on this became public. Currently, you need to buy a new pair of jeans.

Scenario III: unethical behavior & social media

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Master Thesis 43 plants in places that are known for child labor, unsafe working conditions, 60 working hours per week in average and low wages. You saw a small newspaper article about the Black2Blue Jeans with the headline: “Black2Blue Jeans Scandal in Bangladesh: Child labor and women abuse!”. You were in rush, so that you could not read the whole article. In the days after, no more information on this became public in the newspaper, but you were confronted with videos, pictures and campaigns that appeared at your social media platforms. Your friends liked, commented or posted the inhuman treatments of the workers in the producing facilities of Black2Blue Jeans. Currently, you need to buy a new pair of jeans.

Questions:

1. Now, you are going to buy you jeans. You go to a big shopping mall where you have a wide range of different retailers. Also, you can find Black2Blue Jeans there. What are you going to do? Are you going to Black2Blue Jeans to buy you a pair of new jeans?

1. I will definitely not buy a jean from Black2Blue Jeans 2. I will not buy a jean from Black2Blue Jeans

3. I will buy a jean from Black2Blue Jeans

4. I will definitely buy a jean from Black2Blue Jeans

When I read a negative article about a business, it affects my opinion, but I would still at the retailer.

1. Strongly Disagree 2. Disagree

3. Neither agree nor disagree 4. Agree

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F.G. Polat 44

I am a person who cares about the ethical way organizations do businesses.

5. Strongly Agree

When I make a decision to buy jeans, I think about the societal effects.

5. Strongly Agree

In the scenario I read, Black2Blue Jeans is not be linked to any unethical event.

5. Strongly Agree

In the scenario I read, the unethical actions of Black2 Blue Jeans are wide spread in the social media and raise high attention.

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Do you use social media?

a) Yes b) No

If yes, do you have?

(Multiple answers are possible) a) Facebook b) Twitter c) Instagram d) YouTube e) Tumblr f) Snapchat g) Vine h) Own blog i) Others:

How often do you use Social Media?

a) Constantly b) Daily c) Weekly d) Occasional

I read online reviews or blog posts before buying a products.

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F.G. Polat 46

What is your gender?

a) Male b) Female

What is your age? What is your occasion?

a) Student