2020: The year reputation damage litigation went mainstream

For years, Argyle has been tracking the business impact of reputation, starting with the principle – validated by our research – that in an age of intangible assets, relationship capital drives reputation, brand and business value.

After a year that saw the confluence of a global pandemic, deep economic and cultural divides, political strife, and dangerous populism in democracies and dictatorships alike, what new risks emerged for corporate reputation?

We see a big trend emerging – one that’s easy to lose amidst all the chaos and screaming headlines: the rise in targeted litigation for corporate reputational damage.

The proliferation of litigation alleging reputational damage has likely been inevitable, as reputation risk management has quickly become the most difficult and elusive challenge organizations face. A well-known Deloitte study, citing the World Economic Forum, estimated that more than 25% of a company’s market value is directly attributable to the organization’s reputation.

As a consequence, reputational damage has become a paramount concern for corporate leaders. In fact, most governance oversight organizations have emphatically concluded that reputation risk oversight is the exclusive province of the board of directors. And among the many drivers of reputational harm, corporate litigation ranks among the highest. The inevitability of litigation claims, particularly securities claims, should come as no surprise given the value at stake.

Many of the reputational harm lawsuits are well documented, such as Boeing shareholders suing board members for their alleged failure to appropriately oversee the reputational fallout from its 737 Max debacle. Google’s parent company, Alphabet, settled a case brought against directors and executives for their alleged concealment of discrimination and sexual harassment issues within the company. The matter resulted in the resignation of Alphabet’s chief legal officer and former Google CEO Eric Schmidt’s departure from the board.

According to the executive publication Agenda, 39 federal securities lawsuits were filed from June 2019 – June 2020 alleging director accountability for reputational harm. This represents a 60% increase from the prior year. Based on the results of recent filings, courts are allowing pleadings to move forward more frequently, and interpreting directors’ duty of loyalty more broadly.

Agenda has further documented at least eight additional federal lawsuits citing reputational damage since July. This includes filings against directors of prominent companies such as Qualcomm and Oracle – all alleging failure to address diversity and equality issues within their companies and on their respective boards. A recent Law.com article by two Wachtell Lipton Rosen & Katz corporate lawyers sums up the Oracle claims as follows:

“A recent lawsuit by a shareholder of Oracle Corporation has opened a new line of attack on companies that have been slow to diversify their board membership and executive leadership team. The complaint alleges that Oracle’s failure to appoint racially diverse directors and officers—while making public statements avowing a commitment to racial diversity—constitutes securities fraud.”

Argyle is seeing a similar trend and uptick in litigation as we help companies assess, navigate and forecast reputational risk. It’s no coincidence that this increase coincides with an ever-increasing public and media scrutiny of corporate behavior. Together with a related demand for greater transparency, attention to ESG factors, and action on troubling societal issues, the reputational risks facing companies and their directors is higher than ever.

It has now been eight years since the World Economic Forum told us that a quarter of a typical company’s market value flows from its reputation. According to Global Finance, citing a recent global survey of 2,000 executives, that number has climbed to 63% in 2019. 2020 has seen the rise of reputation litigation and activist investors targeting directors and executives with success.

While we don’t know how much higher that number will climb, we know what we need to do to prepare ourselves. Companies and boards must anticipate reputational risks before they metastasize. Active stewardship of corporate reputation requires vigilance, commitment, and a stakeholder-facing mindset. Maintaining public confidence and trust on issues involving financial and non-financial assets is essential; if we do it well, we can prevent crises that will materially devalue both.

Interested in learning more about how Argyle helps companies combat reputational risk? Get in touch by completing the form below or by contacting us at rgemmill@argylepr.com

Argyle is an industry leader in risk, crisis and litigation communications. Our international team of former litigators, crisis communications experts, public affairs practitioners and journalists allow us to tackle any reputational and crisis communications challenge. Since 1979, our approach has been grounded not in merely fighting fires, but in helping organizations anticipate, protect and enhance their reputation – including charting a path for reputational recovery following a significant event or issue.

About the Authors

Robert Gemmill

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