Corporate life is rife with scandals, from crazy CEOs who dance naked in front of employees to companies faking sustainability. Scandals can tarnish reputations beyond repair and have a negative impact on everyone involved in the company, causing the companys stocks to plummet and customers to lose trust. Moreover, executives or employees may struggle to secure future employment opportunities. All of this is to say that no company really wants to be caught up in scandals. To avoid scandals, companies need to know all that can go wrong and take pre-emptive measures to stop them. With that in mind, here is a list of some of the biggest corporate scandals in recent history that all startup founders can learn from.

United Airlinesbad customer service

In 2017, U.S.-based United Airlines came under fire for throwing a customer off an overbooked plane traveling from Chicago to Louisiana. The company needed to free up seats for four additional crew members who needed to reach Louisiana and tend to another flight that would be cancelled without their presence. However, when no one volunteered to get off the plane, the airline had to conduct an involuntary deboarding, and David Dao was selected but refused to leave the plane. According to a fellow passenger, Dao tried to reason with airline authorities saying that he was a doctor and had patients to see the next morning. In videos taken by other passengers, it was seen that Dao was screaming as a security officer dragged him off the plane, with his glasses sliding off his face and his shirt riding up above his midriff. This incident deeply tarnished United Airlines image despite the company issuing a formal apology. Customers responded with severe backlash, with some even chopping up their United Airlines credit cards. As a result, the companys stock fell by 4%, bringing its market value down by US$1 billion.

Bed, Bath and Beyond (BBBY)pump and dump

BBBY became a very popular meme stock in August 2020, surging in popularity right alongside Gamestop. But soon after, shareholder Pengcheng Si filed a lawsuit against BBBYs former chief financial officer (CFO) Gustavo Arnal and a large-scale shareholder Ryan Cohen. Si claimed that he lost US$106,480 during the meme stock frenzy and accused Arnal and Cohen of creating a pump-and-dump scheme that artificially inflated stock prices. This claim gained validity from the fact that Cohen had been involved in the turnaround of Gamestop, which made investors confident in his other stock holdings, such as BBBY. However, once the share prices of BBBY began to rise, Cohen started selling his stake in the company, making US$60 million when he cashed out. This scandal took a tragic turn when Arnal jumped off a skyscraper and committed suicide a week after the lawsuit had been filed. Post this, the companys share prices fell by 15%. As of 2023, the company is on the brink of bankruptcy, with BBBY stocks falling to US$2 a share in January. There is doubt whether it will be able to continue staying in business.

Kobe Steel scandalfalse claims about product quality

In 2017, Japanese steel manufacturer Kobe Steel was embroiled in controversy over the quality of the copper and aluminum it was producing. The company admitted falsifying data about the strength and durability of its products. This falsification had, in turn, affected the quality of products being manufactured by its over 600 clients. These clients include Boeing and Mitsubishi in the aerospace industry as well as Toyota, Nissan and Honda in the automobile industry, to name a few. The compromised product quality brought down Kobes shares by 40%. Its CEO, Hiroya Kawasaki, even stepped down from his position after the scandal.

Turing Pharmaceuticalshiking prices

In 2015, Turing Pharmaceuticals the manufacturer of the life-saving anti-parasitic drug Daraprim, raised the price of the drug from US$13.50 to US$750 per pill after obtaining exclusive manufacturing rights. The drug is commonly used to treat infections in people with human immunodeficiency virus (HIV). The CEO of the company, Martin Shkreli, defended the companys decision to hike prices as a matter of capitalism. He claimed that insurance coverage would ensure that those who needed the drug would still be able to afford it. However, the alarming price hike led to the Federal Trade Commission (FTC) of the U.S. and seven state governments filing a case against Shkreli. The court ruled against Shkreli, barring him from the pharmaceutical industry for life. A fine of US$64 million was also imposed on him and his company to return the profits they had earned from inflating the price of the pills. These four stories, albeit very different, show us the impact of making poor business decisions. Corporate scandals have far-reaching consequences, not only for the companies involved but also for their stakeholders, including customers, employees and investors. In three out of four cases, the companies mistreated their customers. United Airlines did so directly by manhandling a customer, Kobe Steel did it by selling low-quality materials and Turing Pharmaceuticals inflated prices. Consequently, they suffered the wrath of customers, and in Turing Pharmaceuticals case, that of government authorities. These scandals highlight the importance of putting customers first and creating a culture of ethics and transparency so that such incidents can be avoided in the first place.

QUESTION 1

Drawing from this case study and your knowledge of the concept of business ethic, what are the potential consequences of a corporate scandal, and how can companies proactively prevent such events from occurring?