Corporate CEOs who apologize to customers by video had better feel sorry -- or they’ll end up sorry, study finds
August 15, 2013
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Aug. 15, 2013 - When Apple CEO Tim Cook apologized in April to
the Chinese people for the company's iPhone warranty and repair
policies, he did so via a letter posted on the company's Web
site, the same method used last year in another mea culpa to
Apple customers about the company's map apps. In an era when
CEO apologies have developed into an emerging art form on YouTube,
shouldn't Apple be doing more than posting letters of
regret?
Probably not, new research suggests. CEO apology videos, it
finds, are hazardous undertakings that can easily prove
counterproductive -- and for reasons that were hinted .at
almost 150 years ago by none other than Charles Darwin when
he hypothesized that some facial muscle actions associated with
strong emotion are beyond voluntary control.
A paper that was presented at the annual meeting of the
Academy of Management (Orlando, Aug.
9-13), employs advanced technology to bring Darwin up to date
in analyzing 29 corporate apologies over a recent five-year
period. It finds that, "while verbal content of an apology has
relatively minor effect, inappropriate facial emotions can be
greatly detrimental to stock market performance....A brief leakage
of disgust, or a misplaced smile, can damage fragile relationships
and send stock prices plummeting."
Leanne ten Brinke of the University of California, Berkeley, who
carried out the study with Gabrielle Adams of the London Business
School, compares decisions to put CEOs before the camera to
the decisions defense lawyers make on whether to put defendants on
the witness stand. "If you're going to go before a camera and
say you're sorry, you'd better feel sorry, or your facial muscles
may betray you and only make matters worse. Can a top corporate
executive who doesn't feel particularly regretful be coached into
looking that way convincingly? Probably not. How do you achieve in
a day or two what may take professional actors years to
master?"
The research sample consists of all corporate
transgressions from 2007 through 2011 for which apology videos were
publicly available along with company stock-performance
data sufficient to gauge to what extent returns departed from
normal patterns in the wake of apologies. Some 29 events met
the data requirements including such notorious ones as the 2010 BP
oil spill, JetBlue's 2007 operations breakdown that caused
severe travel disruptions for its passengers, and Mattel's
2007 recall of more than 18 million products because
of possible dangers they posed to children. In 16 cases the
video apologies were delivered by a CEO and in 13 instances by
another company executive.
Unsurprisingly, the research revealed that, on average,
companies sustained negative returns of 12.78% over the course of
the 30 days before the apology, a period that in most cases
included the foul-up that made the mea culpas necessary. The
downward trend continued the day of the apology and the following
day but improved to 3.78% below the long-term norm in the 30 days
following the video.
Of greatest interest to ten Brinke and Adams, though, was how
the apologies affected stock performance on apology day and apology
day plus one, when the market's reaction to the video was likely to
be most clear -and, specifically, whether differences in the audio
and visual components of the videos might be related to differences
in financial returns on those days. Why, for example, was the
apology of Sony CEO Kazuo Hirai to Playstation subscribers
accompanied by a 2.37% return above the norm on video-release day,
while that of Netflix CEO Reed Hastings to his customers brought
negative abnormal returns of 7.44% on release day and 9.70% the day
after?
The authors found that the only verbal content that was related
to financial outcomes, and just slightly, "was the inclusion of a
remorseful statement, although this was only marginally
significant. This suggests that other verbal content of an apology
such as promises to repair or offers of forbearance… do not have a
strong effect," they write.
In striking contrast, analysis of the facial expressions of the
apologizing executives with the sound off to avoid potential bias
introduced by speech content or tone of voice uncovered highly
significant effects. To quantify phenomena as elusive as facial
expressions, the researchers employed a method that has been
developed in other research on deceptive behavior, whereby video
content is broken up into 30 still frames per second and trained
coders scan each frame, the lower and upper face separately, for
expressions conveying happiness, sadness, and disgust. "Facial
hemispheres are coded independently," the authors explain, "because
coding full-face expressions is not sufficiently sensitive to
capture the complexity of emotional facial movement…[E]motional
signals of deception are rarely full-faced and instead are seen in
particular muscles that are less under volitional control."
The researchers quantified inappropriate affect by having coders
count frames to determine the duration of disgust and happiness
expressed by the upper or lower face in contrast to expressions of
sadness. As ten Brinke and Adams explain, "The apologizer should
neither show nor feel happiness about the transgression committed,
or the plight of any victims. Although signs of disgust might
indicate that the apologizer feels distaste for the organization's
transgressions, previous research had found that expressions of
disgust do not occur in genuine expressions of remorse and are
instead a better signal of insincere remorse."
Evidence of happiness, as expressed by smiles, and of disgust,
as evinced by mouths turned down, were strongly correlated with
negative stock returns on the day of the apology and the following
day, with less than a 5% possibility that the relationships were
due to chance. In contrast, evidence of sadness "protected the firm
from further damage to stock price."
While these outcomes were true for the sample as a whole, the
most dramatic results were for CEOs, a result that the authors
ascribe to "third-party perceptions that CEOs personify an
organization's values and that inappropriate affect (i.e.,
perceived lack of remorse) on their part makes members of the
public less confident that the organization will avoid similar
future transgressions."
"Obviously, not all stockholders watch an apology," ten Brinke
adds. "But those that do see it and are struck by lack of remorse
evidently suffice to have a substantial negative effect on market
prices, particularly when the apology is by a CEO. As reports of
their reactions spread through the market and create concern among
other investors, the stock price will take a hit."
The paper, entitled "Inappropriate Facial Expressions in Public
Apologies Predict Investor Confidence," was among several thousand
research reports at the Academy of
Management annual meeting, held in Orlando from
August 9th through 13th. Founded in 1936, the Academy of Management
is the largest organization in the world devoted to management
research and teaching. It has some 19,000 members in 110 countries,
including about 11,000 in the United States. This year's annual
meeting drew more than 9,000 scholars and practitioners for
sessions on a host of subjects relating to business strategy,
organizational behavior, corporate governance, careers, human
resources, technology development, and other management-related
topics.