A Bad Reputation Is a Governance Risk: Does your board need an integrated reputation governance committee?

• Author: Kossovsky, Nir
• Position: THE AGE OF RISK: Character & Culture in the Recovery

Stakeholder disappointment and anger over a succession of failures by companies to anticipate, mitigate and respond to the impacts of reputational crises--including COVID-19, social justice issues, privacy breaches, sexual harassment and abuse in the workplace--have propelled a tsunami of reputational challenges into corporate boardrooms. How boards oversee these challenges could affect the present trajectory of derivative litigation as well as transform enterprise risk management and its governance for generations to come.

Enterprise risk management needs an overhaul urgently. Board members are right to be concerned; they personally have a lot at stake.

Most companies today disclose in public filings that their reputation is core to their competitiveness and loss of that reputation would likely impair their ability to meet operational and financial goals. It is an asset affecting the value of the enterprise. The Caremark International litigation that set the legal standard for board liability implied that boards have a duty to oversee mission-critical processes. Marchand v. Barnhill affirmed recently that "mission-critical" means a host of business-specific processes (such as safety, innovation and even environmental protection) that underpin certain companies' reputations and enterprise values. Plaintiffs' lawyers are thus seeing a new array of potential opportunities to spotlight boards' mishandling of reputation and breaches of their duty of loyalty.

In addition, board members are being targeted in the court of public opinion, their personal reputations sullied, their board seats lost and their opportunities for service on other boards diminished. Recent high-profile targets of social and mainstream media thrashings include directors from Wells Fargo, Boeing, PG&E, Equifax, Weinstein Company and Purdue Pharmaceuticals.

If they are going to be in the crosshairs for reputational crises, board members should take control of the reputation risk oversight process. As a first step, they need to steer their companies toward viewing the enterprise risk management process differently.

Reputational risk is a strategic behavioral economic peril of angry, disappointed stakeholders whose expectations are not fulfilled by corporate actions. The risk can affect sales, margins, market cap, employee relations, cash flows, regulatory actions and more.

Effectively managing this strategic risk requires transforming enterprise risk management at the...