As the French say: “The road to hell is paved with good intentions”. But in the Business world, is Heaven paved with bad intentions? Some companies seem to be taking advantage of corporate fraud to rebrand themselves…
In July 2024, the French clothing retailer Kiabi discovered it had been the target of a financial fraud of unprecedented level, orchestrated by a former treasurer who had left the company one year earlier. The embezzlement, totalling 100 million euros, is a stark reminder of the devastating impact corporate fraud can have.
This deliberate misrepresentation, executed by a company executive to manipulate financial performance and deceive investors, regulators, or the public, is one of the most damaging ethical breaches in the corporate world, posing a severe threat to trust and companies’ reputation. More generally, corporate fraud refers to illegal or unethical activities undertaken for personal or corporate gains, often based on falsified information to enhance financial health, deceive regulators or mislead investors and other stakeholders.
Yet, surprisingly, some corporations manage to weather these storms and come out even stronger, raising a controversial question: is committing fraud a bet worth taking for some businesses?
High risk, high reward?
Here are some concrete examples of frauds which provided substantial short-term benefits:
- First, Wells Fargo, a major American multinational financial services company, created millions of fake accounts which helped the bank achieve aggressive growth targets.
- Second, Volkswagen’s 2015 emissions scandal. The German automotive manufacturer cheated by modifying the motor calculator to appear compliant with environmental regulations.
- Lastly, Enron, a historical example, used falsified financials to present itself as a rapidly expanding energy giant.
In each case, the short-term rewards were undeniable: soaring stock prices, market dominance, and huge profits. Fraud here seems to serve as a shortcut to competitive advantage.
What’s at stake?
But all that glitters is not gold. Fraud comes with its own set of consequences, most notably on corporate reputation. The exposure of these fraudulent practices drove a storm of public outrage, legal penalties, and media scrutiny. Such scandals lead to a collapse in public trust, generating severe damage on companies’ public image. While Wells Fargo and Volkswagen fought to rebuild trust, Enron’s empire collapsed. The company no longer exists.
However, reputation is more than just public image, it is a currency of trust, essential for business continuity. When trust is lost, stock prices plummet—as seen with Wells Fargo’s substantial stock price drop—customer loyalty evaporates, and companies face legal sanctions.
Forgive and forget
When fraud is exposed, reputational damage is often swift and brutal. But can a company recover? As Voltaire wrote in The Sincere Huron: “Le temps adoucit tout” (“Time softens everything”). With time, even severe transgressions can be forgotten or forgiven, allowing companies to rebuild their reputations after a scandal.
By changing leadership, launching transparency campaigns, and reforming internal practices, Wells Fargo managed to partially restore its image. Similarly, Volkswagen’s shift towards sustainability and electric vehicles helped recover market share and consumer trust. These companies show that recovery is possible, but the process is slow and demands decisive action.
The survey conducted for this research, aimed to measure and quantify public perceptions of corporate fraud’s impact on companies’ reputations, potential for recovery and effectiveness of mitigation measures, among 107 respondents (consumers and investors). One of the most significant findings suggested that while fraud damages a company’s credibility, 64% of respondents believe that companies can recover, illustrating consumers willingness to forgive.
Of course, not all fraud cases end in recovery, Enron’s case is a stark reminder of what happens when fraud is ingrained in a company’s culture. No amount of reactive measures or regulatory compliance could save it from bankruptcy.
The consumer is king
One of the most striking aspects of corporate fraud recovery is the role of consumers. According to our survey, over 70% of respondents have not boycotted a company involved in a fraud scandal.
This suggests that while reputation takes a hit, consumers’ actions may not always align with their initial outrage. Whether it is due to convenience, brand loyalty, or a belief in second chances, many customers and investors remain willing to support companies after fraud scandals, provided they take steps to rectify their actions.
The survey findings reveal a surprising possibility: for some companies, the benefits of fraud may outweigh the risks. Companies like Wells Fargo and Volkswagen have not only bounced back but, in some cases, emerged stronger. Their ability to rebrand, adapt, and reposition has, in the long run, allowed them to prosper.
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Does the gamble pay off?
Indeed, after the scandal, Volkswagen’s pivot towards green technology not only helped regain some of its lost reputation, but also allowed it to remain competitive in an automotive industry moving towards electrification. By rebranding itself as an innovator in electric mobility, Volkswagen successfully tapped into a growing market and was able to surpass pre-scandal sales levels, highlighting its resilience and adaptability.
So, can fraud really be an effective strategy? The answer is a tentative yes, if a company is prepared for the heavy cost of recovery and can successfully manage the aftermath. But make no mistake, this does not suggest that fraud is a winning business strategy. While recovery is possible, and fraud sometimes is a triumphant method, for every Volkswagen or Wells Fargo that bounces back, there is an Enron that crashes beyond repair.
