Talent loss proves costly to businesses following corporate wrongdoing

Employees are more willing to leave their job when their employers engage in stakeholder violations - public wrongdoing that may range from environmental damage to fraud - and more employees quit when the sanctions are broad in scope, occur in rapid succession or involve novel categories of misconduct, according to new Cornell research.

Forrest Briscoe, who holds the Maurice and Hinda Neufeld Founders Professorship in Industrial and Labor Relations in the ILR School, also found that these migration patterns hold across seniority, education level, income level and geographies, and that the departing employees tend to move to companies and industries with records of fewer stakeholder violations.

"We are underestimating the effects of firms engaging in stakeholder violations," Briscoe said. "We tend to look at the monetary amount of the fine and say, 'Oh well, that's the cost of doing business,' but if we also take into account these effects on human capital, which are often harder to observe but which our evidence suggests are happening, that's a significant additional cost."

The paper, "Seeking Greener Pastures: Employee Turnover Following Corporate Stakeholder Violations," published Jan. 9 in the Academy of Management Journal.

Stakeholder violations occur when a company's actions disregard the interests, or harm the rights, of any individuals or groups with an interest in the company, such as employees, shareholders, customers or suppliers.

Using eight years of job history data from 735 large U.S. public companies, Briscoe and his co-author, Mark DesJardine of Dartmouth College, also found supplemental evidence suggesting that employees leaving in the wake of violations do so voluntarily, and not because the stakeholder violations deteriorate their employers' financial vitality or workplace conditions.

"In just observing that employees are leaving, you don't know exactly what the motivations are, but we were able to indirectly establish it being a reaction to concerns about their reputation," Briscoe said. "One of the corroboratory pieces of evidence was Glassdoor ratings of the company's culture and values, which go down at the same time as the exits are increasing."

The researchers also found that when a company's violation penalties were equivalent to 5% of its annual revenues, they saw a 3.9% increase in employee departures, rising to over 10% when a company committed another, different kind of violation, or when violations occurred across more states.

"For businesses, turnover is one of those things that is chronically underappreciated when you look at financial impact," Briscoe said. "Beyond the obvious hiring and training costs, you're also losing human capital, social capital and, if the individual is involved in innovation, you're potentially losing that to rivals.

"When corporate misdeeds come to light, business leaders and investors are often asked about the total fallout. Beyond fines and tarnished branding, our research indicates that to grasp the true extent of damage, one needs to add up the significant costs of subsequent talent losses."
Julie Greco is the communications director for the School of Industrial and Labor Relations.