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Monday, September 23, 2019

C-Suite Advisory

CEOs Face Heightened Risk to Personal Reputations

Business People

There was a time when corporate reputation was marketing’s product, and reputation risk was marketing’s responsibility. Recent legal events are all flashing warning signs to CEOs and board members that reputation risk, having become now both a corporate and personal matter in courts of law as well as in the court of public opinion, demands an integrated governance and enterprise reputation risk management strategy.

Steel City Re’s research shows six shareholders’ lawsuits filed in U.S. federal courts over the past nine months alleging board culpability for causing reputational harm – more than were filed in the entire seven years prior to that.

In one recent legal proceeding, the SEC extracted a $5 million settlement from SeaWorld – including $1 million in penalties and disgorgement from the CEO – for failing to disclose and effectively mitigate the detrimental reputational impacts of a recent documentary, despite describing its reputation as one of its ‘most important assets’ in public filings.

In another highly visible case, Wells Fargo will pay $320 million, including a disgorgement of $80 million from executives and board members, to shareholders as a result of litigation that claims, among other things, that the board failed to fulfill its fiduciary duty to oversee the company’s reputation risk management framework.

Add to these civil litigations, potential new criminal jeopardy.  The U.S. Department of Justice’s new prosecutorial policy, announced last year, essentially incentivizes companies under investigation to lump their individual leaders—even those who may have acted in good faith—into the pool of suspected offenders. DOJ’s motivation: It’s belief that “corporate cases often penalize innocent employees and shareholders without effectively punishing the human beings responsible for making corrupt decisions.”

Depending on the result of next year’s elections, we may see more corporate witch hunting.  Among the first lines of attack has been U.S. Senator and Presidential candidate Elizabeth Warren’s legislation that would require CEOs to attest that a due diligence inquiry was conducted and found no illegal activity occurring at their company on their watch. CEOs failing to meet that standard could be criminally prosecuted.

With the right integrated governance and enterprise reputation risk management strategy, CEOs can protect their companies and themselves from this new material corporate and personal exposure. But first, they need to understand the nature of the risk.  When companies report in their public filings that reputation is among their material risks, they create the implicit expectation that the risk will be robustly managed or mitigated.

In the SeaWorld case, the SEC focused on the fact that the company had disclosed reputation as a material asset but failed to outline adequate plans to mitigate the risk of its being diminished. And this isn’t an uncommon mistake.  Ninety percent of the S&P 500 create this expectation by referring to reputation in their SEC filings.  But how well prepared are they to deter reputational crises or defend against them when they occur.

The first step needs to be recognition that reputation risk should be managed not by marketing but by risk management, just like every other enterprise-wide risk.  Marketing campaigns, including Corporate Social Responsibility and ESG, are aspirational in nature, while failing to address corporate operations which truly underlie reputational value. What a crisis hits and stakeholders ask whether the company did all they could reasonably expect to prevent it, they are going to take little comfort from transparently superficial marketing programs, even if well-intended and noble in purpose.

Insurance is a universally used tool to manage risks and skilled risk managers understand how to deploy it effectively. For example, D&O coverage may insulate against direct litigation-related costs, however, it does nothing to protect individuals in the courts of public opinion or indemnify financial damages, like lost future incomes, caused by tarnished reputations. They need to consider comprehensive, enterprise reputation risk management solutions that can work in parallel with D&O policies to preemptively bolster the credibility of corporate leadership in a manner that is clear and simple to understand.

Third-party warranties, validation and insurances do just that, providing CEOs with the best protection against financial damage resulting from reputational crises. They demonstrate to stakeholders that outside parties have analyzed the company’s operations, processes and governance strategies and found them sound. This preemptive vetting, a warranty in effect, makes it difficult for activist investors, politicians, and regulators to gain traction in any attacks against individual leaders.

Simply put, marketing isn’t good reputation risk management, but good reputation risk management backed by reputation insurance is powerful marketing.  Losing sight of that could land CEOs in the hot seat with stakeholders – and possibly the courts of law.


Written by Nir Kossovsky.

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Nir Kossovsky
Nir Kossovsky is CEO of Steel City Re, which analyzes and offers risk management tools and insurance to protect the reputational strength and resilience of companies. Nir is an opinion columnist for the CEOWORLD magazine.
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