When it comes to the most-admired companies, Google tops many of the lists as being highly innovative and a great place to work. The company is also facing two prominent lawsuits from former employees: a gender-pay lawsuit filed by women who claimed they were paid less than their male counterparts and a lawsuit alleging discrimination against conservative white men.
For Google, the “halo effect” from its high-prestige could be an advantage in defending against these lawsuits. But should Google be found liable, that halo could quickly become a liability, opening the company to the risk of severe punishment and harsh criticism.
The reason is a phenomenon we call the “halo tax,” which we discovered in our research into how a company’s reputation and prestige affect outcomes in discrimination lawsuits. Using a unique database of more than 500 employment discrimination lawsuits between 1998 and 2008, we concluded that the greater the company’s prestige, the less likely it would be found liable because of the halo effect. However, once a prestigious company was found liable, punishments were more severe, which shows that prestige can be both a benefit and a liability, depending on whether a company is defending itself or its blameworthiness has been firmly established.
Our study demonstrates that prestigious companies are punished more harshly when they are found liable for discrimination in all forms, including cases alleging discrimination based on gender, race, ethnicity, age, and religion. But our findings represent a special precaution for firms that are struggling with whether and how to address sexual harassment in the workplace, given the many high-profile cases that have appeared in the media recently. Our study underlines why it is especially important for leaders of prestigious companies to be diligent in ensuring their workplace culture is closely aligned with the values they espouse.
Saying one thing and doing another is hypocritical, which as our research suggests incites more severe backlash by activist investors, analysts, the media, and others. An example is Wynn Resorts, which is part of the S&P 500 and owns premium resort properties in Las Vegas and China. After allegations of sexual misconduct were brought against him, CEO Steve Wynn resigned, but denied all allegations, although he and legal advisors reportedly set up a shell company to pay an accuser $7.5 million. The fallout on the company was a steep decline in its stock price, and greater scrutiny by gambling regulators of the company’s board and executives.
In conducting our research on discrimination lawsuits, we examined status and reputation separately. For status, we looked at the perception of being highly regarded by peers and analysts in their industry. For reputation, we focused on companies that were rated as high- quality employers, often due to their culture and workplace policies. Our findings suggest the companies punished most harshly when they are found liable for discrimination have a high status and reputations for being good employers. This suggests that different companies may face varying levels of risk for hostile workplace cultures. For example, ride-sharing pioneer Uber, listed among USA Today’s most hated companies, is known to have culture problems and may ultimately face consequences for allegations about sexual harassment and workplace discrimination. But Uber did not have a “halo” to tarnish; its problematic culture was well known. However, when a much-admired company falls into disgrace, its high status translates into having much more to lose. Activist investors and the media seem to be more willing to make an example of these firms.
That’s a cautionary tale for much-admired firms not to let prestige instill overconfidence, and lead them to neglect their workplace culture. For example, the technology industry includes many highly admired companies and desirable employers. At the same time, the industry has been criticized for a lack of gender diversity, especially among engineers. Tech companies such as Apple, Dropbox, Facebook, IBM, LinkedIn, and Microsoft have signed the White House Equal Pay Pledge to address gender gaps. Should one of these firms face a gender discrimination suit in the future, any halo effect gained from the pay pledge could very well turn into a halo tax.
For leaders, avoiding a halo tax is a matter of ensuring there is no difference in the values that a company portrays outwardly versus how it acts inwardly. If any hypocrisy is exposed by a discrimination suit in which the company is found liable, the outrage will be all the greater. The prestige they have taken such care to build will suddenly become a liability.
Brayden King is professor at the Kellogg School of Management at Northwestern University. Mary-Hunter McDonnell is professor at the Wharton School.