Much research has examined the way firms react to misconduct by exchange partners: buyers, suppliers, employees, etc. The revelation of misconduct forces partnering firms to decide whether the benefits of continuing the relationship outweigh the costs of remaining publicly linked to the offending party. While researchers have examined the topic using various sociological, economic, and organizational theories, they generally portray firms’ responses as a relatively simplistic choice to either maintain or end the relationship. A new Academy of Management Journal article by Michael Nalick (University of Denver), Scott Kuban (Tulane University), Aaron D. Hill (University of Florida), and Jason W. Ridge (University of Arkansas) offers a more nuanced view of the subject. In “Too Hot to Handle and Too Valuable to Drop: An Expanded Conceptualization of Firms Reactions to Exchange Partner Misconduct,” the authors draw from theories on mixed gambles and negative spillover to show that the calculation is more complicated than simply maintaining or ending the relationship. Since companies are often torn between the opposing desires to avoid negative spillover or preserve beneficial relationships, firms employ complex strategies in their efforts to manage risk tradeoffs in the wake of exchange partner misconduct.
Nalick and his co-authors analyze how firms react to misconduct by a very specific type of exchange partner: politicians. Companies often establish ties with politicians in hope of reaping benefits such as government contracts or regulatory favors. When those politicians are accused of financial, political, or personal misconduct, firms have to decide whether to continue to support them. The authors focus on misconduct by U.S. Congresspersons between 1992 and 2018. Congressional misconduct garners ample media coverage – in addition to investigations by law enforcement and/or Congressional ethics committees – so the authors had a large body of readily available evidence to analyze. Moreover, federal law requires politicians to disclose campaign contributions over $200, providing a way to determine if companies stood by scandalized officials who sought reelection.
The authors find that firms react to exchange partner misconduct in various ways. For instance, rather than choosing to simply continue the relationship unchanged or end it completely, firms may try to limit downsides and attain upsides by changing their level of commitment to the transgressor. Nalick and company find that firms are more likely to increase commitments when their relationship with the accused is older and more embedded. This is partly because they don’t want to lose previous investments in the relationship. Additionally, standing by the alleged miscreant might engender gratitude that could yield additional benefits down the line. Another response the authors identify is hedging against risks. Hedging involves adding new partners while maintaining existing relationships. In the case of politicians, this could mean donating to both candidates in an election. While donating to a candidate’s opponent might erode that relationship somewhat, companies who do so believe it’s worth that risk because the scandalized incumbent might lose. A similar risk trade-off calculation informs the final response the authors identify: firms may “boomerang” by temporarily ending the relationship with the misbehaving partner, then renewing it after the “smoke has cleared.” Here again, they find companies are more likely to renew older, embedded relationships that offer more certainty.
This study has implications for both managers and researchers. It offers both groups a nuanced and realistic view of the options for addressing exchange partner misconduct. It also paves the way for researchers to examine related topics. For instance, the authors suggest that future research might investigate how firms manage risk when responding to misconduct by buyers or suppliers rather than politicians.
Read the full article in the Academy of Management Journal.