So how do consumers react when the ‘bad apple’ is a scandal-ridden financial company? How much do sales suffer as a result of its wrongdoing? What are the effects on sales of other similar companies such as pension providers, fund managers, and insurers?

That’s what Henrich Greve INSEAD-chaired professor of Organisation and Management Theory sought to find out with his academic colleagues Stefan Jonsson of Uppsala University and Takako Fujiwara-Greve of Keio University. Their results are published in a recent edition of Administrative Science Quarterly.

They focused on Skandia, one of Sweden’s oldest and biggest financial groups. And, until 2002, one of the country’s most respected companies. Then a series of scandals broke that led to the resignation of many senior staff, and the chief executive being given a prison sentence (although this was later overturned on appeal and charges were dropped).

Swedes’ confidence in the financial industry plummeted. Skandia lost its independence to a South African rival, Old Mutual, which launched a hostile takeover.

The first scandal broke after Skandia sold its asset management operations, SAM, in January 2002 to a Norwegian bank, DnB for around US$320m. There was nothing illegal about the deal, but the Swedish media and public felt that Skandia had done something wrong. It seemed to offend their sense of fair play; the money from the sale went to the main Skandia firm, and commentators felt that customers who had Skandia Life insurance policies would suffer indirectly.

Estimates suggested that around two-thirds of the value of the asset management division came from the long-term contracts that it had with the other parts of Skandia to handle the investments that backed insurance and pension policies.

Controversy over the SAM-DnB deal may have been a bit too complicated for the average investor to care about. But the media -- and shareholders -- scented blood. Throughout 2002 and 2003, newspapers were full of stories about Skandia paying US$20m or more in illegal bonuses to senior staff, of managers’ relatives renting homes in the centre of Stockholm cheaply from the company (many Swedes felt they had unfairly jumped queues), and of executives using Skandia money for luxury renovations of their homes.

An investigation concluded the actions of some senior managers had been "unsuitable, unethical and in some cases probably illegal".  Not surprisingly, consumer confidence in Skandia plummeted and it lost business.

Greve and his colleagues theorised that the scandal at Skandia might affect confidence and business for other firms in similar areas. “Trust is fundamental for economic exchange,” the authors say. “Once customers see a problem in one firm, they are not willing to assume that everything is well in other firms that resemble it, and they may protect themselves by cutting off transactions with firms that now have become suspect.

“Among the questions they focused on: did Swedish consumers trust mutual fund managers less as a result? What were the effects of the property scandal on firms involved in the real estate industry?”

Also, Skandia was a big prestigious firm. Was any spillover worse for larger financial companies that might resemble Skandia, or were smaller companies equally affected? Broadly speaking, the more a company resembled Skandia in the way it was organised or in its line of business, the more it suffered as customers were more likely to take their money away. The largest withdrawals coincided with the periods when the media paid the most attention to Skandia.

But conversely, some financial companies benefited. Investment flowed from mutual fund families operated by subsidiaries of Swedish insurance firms to independent operators, and funds run by subsidiaries of foreign firms.

The customers may have worried too much, and actually hurt their own interests. Greve and his co-authors point out that as the value of mutual funds is based on the value of the stocks and shares that make up the funds. Investors may worry that “tainted” managers would underperform. But the team found there was no evidence that fund managers which suffered big Skandia-related outflows made lower returns.  In fact, some investors who pulled out when the media coverage was at its most negative, may have missed out on some subsequent periods of better-than-average returns.

Skandia’s chief executive at the time, Lars-Eric Petersson, and the board lost their jobs as a result of the scandal. They obviously paid a price for their actions. But Greve and his co-authors’ work suggest that the effects of a scandal can be contagious, and harm customers, shareholders and reputations of many other firms.

Undeserved Loss: The Spread of Legitimacy Loss to Innocent Organisations in Response to Reported Corporate Deviance by Stefan Jonsson, Takako Fujiwara-Greve and Henrich Greve was published in Administrative Science Quarterly, June 2009.