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.
If leaders of food companies didn't have enough reputational issues on their minds from risks like tainted food, disruptions to the supply chain, ethical treatment of food sources and employee or executive misconduct, they now need to be cognizant of additional reputational perils. These perils could affect every board member or top executive personally. But the insurance industry and risk management professionals can anticipate these new perils and have their backs.
Consider these recent board exposures: A leading beverage company is required by the SEC to include a proposal in its proxy materials that the board commission a report assessing the risks to the company’s reputation associated with changing scientific understanding of the role of sugar in causing disease. Or a proxy proposal at another beverage company would require the board to consider the effects of its products on obesity and cites it as, among other things, a material reputational risk that the board has failed to address.
Disappointments with ineffective reputation risk management by Boards of Directors have motivated six shareholder derivative lawsuit filings over the past nine months, according to research from Steel City Re. Reputation was mentioned in more derivative lawsuits during this period than in the entire prior seven years.
Nine out of 10 S&P 500 companies refer to reputation in their public SEC filings — often repeatedly — as a material risk to the companies’ future performance. But few if any describe meaningful plans for mitigating the risk.
It seems eminently clear that board members are putting themselves personally, and their companies, at greater risk of litigation by failing to understand the nature of reputational risk and how to combat it.
To the extent that they employ reputational strategies, most rely on marketing, corporate and social responsibility (CSR) campaigns, and more recently, environmental, social and governance (ESG) programs. One need look no further than Whole Foods’ efforts to fight poverty around the world through microlending or Starbucks’ support of programs to deliver clean drinking water or Coca Cola’s commitment to recycling programs, to recognize that CSR and ESG are increasingly prominent parts of the corporate identity of many companies in the food industry. Many companies are also making commitments about the types of suppliers they use – commitments related to things like wages, working conditions or sustainability.
Indeed, these are noble undertakings. And they do support some objectives with some stakeholders. Employees like them. Customers value them. But to the extent that companies believe these investments are driving reputational value and supporting reputational resilience, they are, unfortunately, mistaken. If they believe it will protect them from the perils of litigation, regulatory scrutiny or financial impacts when something stakeholders care about passionately goes terribly wrong, then they are, again, mistaken.
Stakeholders, whether they be customers, suppliers, employees, investors or government regulators, have expectations about corporate governance, safety and reliability, business operations and financial performance. When those expectations are shattered, for whatever reason, whether through a natural disaster that destroys a food source or executive malfeasance, stakeholders will be disappointed or angry. The root cause of reputational damage is the gap between expectations and reality.
Marketing, being aspirational in general, often exacerbates this gap. A major mission of a marketing team is to support sales by projecting the best possible image of the company — in some cases, by trying to show that the company’s heart is in the same place as its stakeholders. Unfortunately, while these aspirations may attract and motivate some groups of stakeholders, they provide little insulation in times of crises.
If there’s contamination somewhere in the supply chain, stakeholders are going to wonder exactly what the company’s selection of “ethical” suppliers consisted of. If there are claims of racial discrimination or sexual abuse, or other financial, operational, political or cultural issues that fail to meet stakeholder expectations, they are going to wonder if the CEO was too focused on drinking water in Africa or microentrepreneurship. In fact, when companies raise values-based expectations to unrealistic levels, the inevitable disappointments will be far greater when crises hit.
Marketing, which is valuable in communicating with customers, employees and third-party social activists, is not risk management.
To convey a coherent story of operational control to key financial and legal stakeholders, prudent companies are now realizing that risk managers should be managing their reputation risk as they do every other enterprise risk. Risk managers are accustomed to engaging every aspect of the organization in identifying those risks, minimizing them and protecting against them. Enterprise risk managers, more often than not now holding titles such as treasurer, chief risk officer or chief financial officer, know how to talk to market analysts, creditors and other financially savvy stakeholders.
Risk managers will immediately understand the importance of third-party analyses and the type of insurance products that are now available that act as warranties on governance — making clear to lawyers, activist investors, regulators and others that outside underwriters have confidence in their systems and practices. That is the surest way of sending a simple, clear, convincing and authentic message to all stakeholders that company leadership has done its job. It is also the surest way to protect directors and officers as individuals.
Just as directors and officers coverage gained popularity decades ago when it became clear that any drop in stock price could prompt a lawsuit against corporate leadership, reputational insurance products are now becoming necessary to protect many of those same corporate leaders from additional claims that their boards neglected to adequately address reputational risks that they themselves had disclosed as material.
Directors and officers policies don’t help in situations where adjudication begins almost instantly in the court of public opinion — they only insulate against direct litigation-related costs associated with courts of law. And they certainly don’t protect individuals from the future income they stand to lose if they are personally associated with a company whose reputation is in tatters.
Simply put, companies and their boards are leaving themselves exposed when they enumerate reputational risks in their public filings without having clear and convincing plans to mitigate those risks. And they’re leaving themselves open to the increasing risk of criminal exposure in light of a recently adopted Department of Justice policy stating that investigations previously have too often concluded "without effectively punishing the human beings responsible for making corrupt decisions."
Companies in the food industry are particularly susceptible to reputational incidents. No industry is more critically integrated into people’s lives or more highly scrutinized. Executives and board members need to protect themselves through preemptive and credible enterprise risk management and governance strategies — otherwise, they are putting themselves and their companies at the mercy of the courts of law and public opinion.