Topics: Business Ethics,Corporate Social Responsibility,Leadership
Topics: Business Ethics,Corporate Social Responsibility,Leadership
September 4, 2018
September 4, 2018
“The CEO did what?” While this question may be popping up in boardrooms a lot lately, corporate reputation crises are not new. Companies have long faced risks associated with their operations—risks that a process, product, or service will result in injury, real or imagined—which can result in reputational harm. However, with the increasing use of social media as both a medium for executives to share their viewpoints and as a forum for public debate, boards must now oversee the risk that an executive will become the focus of a public controversy that could threaten the company’s goodwill and social capital.
Under common law, goodwill entails a group of intangible corporate assets, including stakeholder trust and corporate reputation, and is directly related to the value and quality of a company’s social capital. These assets can be subject to risks that manifest in multiple ways, ranging from unfiltered tweets to moral missteps, and to violations of law. In cases in which an executive is the face of the company, reputational risks that arise from the executive’s behavior can be particularly sensitive for boards to navigate. Due to the current social media climate, a high-profile blunder or scandal of any variety or degree can result in a decline in the company’s stock price, not to mention investigations, litigation, and intense public scrutiny and criticism.
Elon Musk tweets about corporate strategy, Nasdaq temporarily halts trading of Tesla’s stock, and regulatory inquiries ensue. Papa John’s founder resigns after allegedly making offensive comments and subsequently creates his own website to argue for a change in corporate leadership. Uber Technologies’ CEO resigns amid numerous allegations regarding his oversight of and participation in a toxic corporate culture. Steve Wynn resigns as chair and CEO of Wynn Resorts after allegations of decades of sexual misconduct hit the press. These are just a few examples of the very public corporate scandals that have rocked companies’ reputations recently, and the fallout in each case has threatened to tarnish the company’s goodwill and social capital.
So how should directors oversee the potential for a reputational crisis based on an executive’s behavior? While typical, boards should make sure they are prudent in their appointment or approval of executives, including asking candidates to disclose information that would be relevant to assessing the likelihood that their conduct could create reputational risk. Any hesitance to discuss sensitive or potentially controversial matters should not overshadow a board’s duty to ensure that the company is operating in the long-term interests of its shareholders, including the protection its goodwill among its stakeholders.
Beyond a thorough vetting process, we recommend the following steps.
While it is impossible to foresee every risk or forestall every harm, boards that both monitor whether executives are enhancing (rather than compromising) the company’s social capital and plan for contingencies, will position their companies to be better-equipped to weather any reputational crisis that may develop.