Company Leaders Face Personal Risk when Reputational Crises hit

The United States endured one of the worst coal ash spills in history in 2014, at a power plant owned by Duke Energy. These kind of incidents inflict momentary and sometimes lasting damage to the reputation of companies.

In addition to the direct costs incurred by Duke–$600 million in operational costs and consequential plea agreements–the company suffered a $12 billion impairment in market capitalization growth relative the performance of the Dow Jones Utility Index.  Strong companies like Duke are usually able to recover even from significant events like this one.

There was a time when D&O insurance was viewed by many as an unnecessary luxury.  Why would board members need D&O insurance if they hadn’t done anything to cause any legal liability?  Then the lawsuits started and D&O coverage became commonplace.  Today, boards are facing a new challenge in attacks on their reputations that are waged in the court of public opinion. News, allegations and innuendo all get mixed together as the media and politicians seek to focus public anger on specific targets. 

What’s causing this shift and what steps can companies take to protect their leaders?

New research notes several factors, but primarily increased generalized public anger towards large institutions, outsized expectations by stakeholders and the weaponization of social media. Whether through social media or traditional sources, when something goes wrong the public looks for someone to blame–and increasingly, they want individuals to pay a price.  Social media has made it more convenient and faster to channel that anger.  Government officials have now learned to use these tools to their advantage, as have activist investors with their own agendas. 

Unlike corporate reputations, which often bounce back from damage, attacks on personal reputations are much more difficult to repair.  And even the best governed companies and most diligent boards are vulnerable. 

The energy industry is not alone in being affected by this growing trend.  We’ve seen it in banking, pharmaceuticals, automotive and others.  What makes the energy industry such a target is that its mistakes are often visible.  Environmental accidents don’t require imagination–they’re there for everyone to see. And the media will cover it extensively every time.

Data analyzed in research released in December by Steel City Re, which draws from 14 years of observation and 60 million data points for 7,500 public companies, shows that over the five-year period between 2011 and 2016, energy companies and their leadership are up against quite a lot. Such as:

1.  Losses linked to reputational damage at public companies have increased by 461 percent over the past five years.

2.  Losses experienced due to reputational issues directly correlate to increases in generalized public anger as demonstrated by angry posts on social media.

3.  Social media has become weaponized as a result of its speed and penetration, combined with the heightened level of generalized societal anger seeking outlets on which to vent.

4.  Outsized expectations by investors about corporate performance, often exacerbated by stock buy-backs that raise stock prices short-term, have created increased vulnerability and potential for losses when companies are attacked.

In the face of these new realities, company leadership must consider their own potential for serious financial losses when their company’s reputation comes under fire.  Operational accidents happen; some might say they are inevitable.  But the tangible losses from potential reputational damage can be mitigated.  It’s time to consider bringing reputation, and the tools that can protect it, into the board room as a strategic priority.  Like all other industries, energy is not immune to the virality of fake news, damaging social media activity or elected officials who exploit public anger to pressure high profile companies into doing what they want.

About the author: Nir Kossovsky is CEO of Pittsburgh-based Steel City Re, a company that analyzes the reputational strength and resilience of public companies and provides insurance products that protect those companies, their officers and directors against financial losses that occur when reputational crises hit. 

 

 

 

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