[2/2] Around the word: Scandal - C. Collard: “Legal risk management and reputational risk management are two sides of the same coin”

In a mirror article exploring ideas around the notion of “Scandal” (1/2), Giacomo Valletta (EDHEC) and his co-authors showed how consumers reacted to Volkswagen's emissions scandal - punishing the brand briefly before largely forgiving it. But what exactly is a "scandal," and why does it create such specific legal and reputational risks for firms? The following interview with Christophe Collard (EDHEC) examines the mechanisms of a scandal and its structural links to corporate legal exposure (2/2).

The word "scandal" is used constantly in business and media coverage, but does it carry a more precise meaning actually useful for understanding corporate risk?

Christophe Collard: Absolutely. The term actually has a religious origin and originally referred to the idea of a "stumbling block": an obstacle against which one stumbles. That etymology is revealing, because it maps surprisingly well onto the generic definition of risk: "the effect of uncertainty on objectives." A scandal, in other words, is not just a PR crisis. It is a disruption that derails a firm's trajectory, often in ways that were not anticipated.

The first essential element of a scandal is the transgression of shared norms. It is the revelation of this breach (not necessarily the breach itself) that provokes the public's response, in the form of emotion and disapproval. The scale of this collective reaction reflects the public's perception of the seriousness of the transgression.

What role do the media and legal system play in how a scandal unfolds and escalates?

Christophe Collard: The media plays a central and indispensable role: the scope of a scandal depends heavily on the media coverage it receives. Public indignation is relayed and at the same time fuelled by the lawsuits launched by victims and the legal proceedings initiated by public authorities.

This dynamic is well-documented in crisis communication research. A 2008 paper (1) described scandal as a fundamentally public phenomenon, in the sense that it requires an audience, and media acts as both amplifier and sustainer of collective outrage. Without media escalation, many corporate transgressions would remain invisible and legally inconsequential.

There is, notably, a paradox in the judicial dimension of scandal: it constitutes a risk in itself, particularly with regard to financial and reputational consequences, while simultaneously representing the realization, or even the extension, of a pre-existing legal risk. The two feed each other in ways that can quickly spiral beyond a firm's control.

What does this mean practically for how companies should approach legal risk management?

Christophe Collard: It means that risk management must be understood as an anticipatory function, not merely a reactive one. The transgression inherent in the notion of scandal almost systematically translates into the failure to comply with one or more legal norms, leading to complaints and legal action.

This connects to the broader field of legal risk management, where scholars and practitioners increasingly argue that firms must map their exposure not just to explicit legal violations, but to actions that, while technically legal, may transgress widely-held social or ethical norms (2). The Volkswagen case is a textbook example: the emissions fraud was both a legal violation and a norm transgression, which is precisely why it triggered such a sweeping public and regulatory response (3).

My personal perception is that legal risk management must be designed to create value, or at the very least to prevent it from being destroyed. With this in mind, I suggest to consider three types of value destruction that legal risk can generate: strategic value (i.e. the achievement of a company's strategic objectives : I include corporate reputation in the field of strategic value as a matter of principle!), financial value (pecuniary sanctions, damages, communication expenses, additional costs, but also losses generated by a drop in sales, a reduction in market capitalization, etc.) and institutional value (the quality of the company's relations with public authorities, and civil society institutions).

What can be done to avoid the value destruction associated with legal risks arising from a scandal?

Christophe Collard: It is essential for companies to identify those legal standards that are particularly sensitive, those whose non-compliance, whether voluntary or not, is liable to cause a scandal. In this sense, legal risk management and reputational risk management are not separate issues or disciplines. They are two sides of the same coin.

Research on corporate misconduct and market reactions (4) confirms that firms that proactively disclose compliance failures and demonstrate credible reform suffer measurably smaller long-term reputational damage than those who conceal or minimize wrongdoing.

My intuition, which is borne out by the empirical findings of Giacomo and his co-authors, is that the stronger a company's reputation, the more severe the reputational consequences of a scandal are likely to be. However, a strong reputation also appears to enable the company to recover more rapidly from such an event!

References

(1) Adut, A. (2008). On Scandal: Moral Disturbances in Society, Politics, and Art. Cambridge University Press - https://assets.cambridge.org/97805218/95897/frontmatter/9780521895897_frontmatter.pdf

(2) FCA Handbook on Legal Risk, UK Financial Conduct Authority - https://www.handbook.fca.org.uk

(3) [1/2] Around the word: Scandal - When guilt fades: How consumers punished (and forgave) Volkswagen. EDHEC Vox - https://www.edhec.edu/en/research-and-faculty/edhec-vox/1-around-word-scandal-when-guilt-fades-how-consumers-punished-and-forgave-volkswagen

(4) From Signals to Reform Narrative: Reputation Repair Following Corporate Environmental Misconduct - https://journals.aom.org/doi/abs/10.5465/AMBPP.2020.227