Topics:   Business Ethics,Corporate Social Responsibility,Leadership

Topics:   Business Ethics,Corporate Social Responsibility,Leadership

September 4, 2018

When CEOs Go Rogue: Director Oversight of Corporate Goodwill and Social Capital

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.

  1. Understand the source and value of the company’s social capital and its vulnerabilities. Directors should understand how the company’s reputation and social capital fit in the corporate strategy, including the degree to which their company’s reputation is particularly impacted by the personality of a key executive, and the attendant risks resulting from that strategy. For example, for boards overseeing executives who can be unpredictable, directors should evaluate the degree to which the executive’s actions can benefit the company by potentially raising its profile with the public, including information about its business and strategy, versus harming the company by making it the focus of public controversy.
  2. Read the signs. Most boards are aware if an executive has exhibited warning signs of unpredictable or noncompliant behavior in the past, and that awareness should factor into the board’s review of that executive’s performance and succession planning for his or her role. Key questions regarding how the executive perceives his or her role and responsibilities with respect to the corporate image and social capital should be included in the executive’s performance review.
  3. Engage in proper crisis preparation. Although reputational crises are more difficult to anticipate, ultimately the impact of these risks is not unlike other risks associated with a company’s operations. Proper board-level crisis preparation, including the creation and testing of a written response plan, can help a company navigate even these risks should they be realized. Mitigating the damage of a reputational crisis can be largely dependent on the company’s ability to react quickly and in an effective and targeted manner. Having the right plan in place enables a timely response.
  4. Be proactive about succession planning. Succession planning is one of the board’s most critical tasks, but as governance professionals, we are aware that it can be an area of sensitivity. We suggest that boards desensitize the process by regularly engaging with the members of management that report to the C-suite and include them in general discussions regarding the board’s crisis plan.
  5. Engage governance counsel early. Remember that corporate counsel’s duty of confidentiality can be very beneficial. While many boards leave it to their company’s legal department to engage governance counsel, board-level governance counsel can assist the board in considering its options in advance of a crisis. In addition, counsel can assist boards in reviewing their policies to ensure that the board is setting the right tone at the top with regard to compliance and internal transparency.
  6. Oversee executive-level social media training. Boards can sometimes assume that their C-suite also knows when and how to appropriately use social media for corporate purposes, which is not always the case. An executive-level training covering social media use policies, as well as policies for communicating with outside constituents, generally is often beneficial to all involved.

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.

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