An outline form article from Corporate Counsel provides a terse, useful summary of strategic thoughts for litigation and media battles. Like many others, it builds from The Art of War, but does so efficiently and provides other insights. The points raised include some useful for global battles.
Corporate Reputation Risk - the Increasing Risk of Publicity Regarding Mistakes and Short-Term Thinking
Howard Sklar is a former prosecutor and now a compliance specialist, and put out a brief but interesting new article on the reasons behind the increasing corporate risks of getting caught, or at least publicized. I share his conclusion that the risks are increasing. He frames the topic as follows:
Reputation Risk and the Finance Industry: Will the LIBOR Fraud Turn into "The Tobacco Moment" for Global Finance ?
Especially in these times of economic uncertainty, the global finance industry does not needs the LIBOR fraud debacle. But it's very real, very in the news, and very hard on industry credibility, as illustrated in various ways here and here. As a result, even the Economist is talking about the LIBOR debacle in extreme terms, saying: "This could well be global finance’s “tobacco moment.”
The point for litigation? An entire industry can quickly lose reputation and trust based on the acts of just some members of the industry. Business and litigation judgments need to be taken bearing in mind the reality that no one really is an island, even if it feels good to think otherwise.
Amazing what some will do, regardless of the reputation cost. Some months ago, this post mentioned North Carolina Baptist hospital being the target of a class action because it charged its employees more for health care than it charged other medical groups. Not surprisingly, the hospital chose to settle and pay the class.
But wait, there's more. The hospital now is trying to change the settlement deal after class notice and approval. Apparently the hospital never figured out that it would be responsible for paying the employer portion of the federal taxes on wages. So, now it wants to recut the deal to have its share of the taxes paid out of the fund. Employees, however, would be left to pay their own share of the taxes on wages. The story in detail is told in this motion seeking to block the hospital from changing the deal. This newspaper article tells the story very publicly. So, now that it was almost done being dragged through the media, and after perhaps having saved some face by paying the class, the hospital found a way to once again shoot itself in an appendage. Amazing.
Direct Financial Costs of a Reputation Crisis - Penn State's $ 3.2 Million of Fees as of December 31
Reputation risk problems are expensive even for not-for-profits. Consider, for example, this AmLaw article on Penn State's experience. The university had spent almost $3.2 million on lawyers and other advisors as of year-end 2011. No doubt many more expenses will follow.
Here's a story of short-term gain creating a lousy reputation. A Winston-Salem hospital (N.C. Baptist Hospital) is about to start paying off in a class action because it over-charged its employees for health-care insurance premiums. How? The health care was provided by a plan owned by Baptist and another hospital. The hospital charged its employees more for the health care insurance premiums than it charged to employees of other companies.
The hospital apparently took in an extra $ 5 or so million over a period of years. One wonders how it values the negative consequences of the resulting publicity, and how the annual bonus pool is looking for the people who approved the over-charging. Once can also wonder if the hospital was guided by a lawyer who wrote a letter arguing the overcharge "could technically be legally" instead of saying "this is a really bad idea."
Here's the key quote:
"Baptist has denied any wrongdoing. It said the selection of MedCost was a plan-sponsor function, not a fiduciary function, and therefore its actions were not governed by ERISA.
"NCBH alleges that cost is only one factor in a prudence analysis, and that MedCost provided superior service or capabilities in other areas that justified any increase in cost," Baptist said in June 2009.
However, according to the agreement, the plaintiffs' attorneys "obtained reliable documentary evidence to suggest that NCBH had a history of 'self-dealing' with its subsidiary provider network. Indeed, that evidence indicated NCBH was even offering better pricing to outside health plans that used the MedCost network than it was offering its own plan and own employees."
Reputation and financial risk are once again headline news as the CEO of UBS has now resigned because of the latest "rogue trader" scandal.
The label "rogue trader" is interesting and great corporate spinning. But, how many times can traders be called "rogues" when there are compliance departments, and traders are placing trades for a bank, in its name? One has to wonder if the more accurate label would be "badly monitored trader." Some USB history is told in this apparently not flattering book.
Key excerpts follow:
"GENEVA (AP) — UBS chief executive Oswald Gruebel has resigned over a $2.3 billion rogue trading loss, the bank said Saturday. The move ends days of speculation about whether Gruebel could retain his position following the latest scandal to hit Switzerland's biggest bank.
London-based UBS trader Kweku Adoboli was arrested last week and charged with fraud and false accounting for the $2.3 billion loss. A judge ordered him Thursday to be held in jail until a hearing next month.
The announcement also noted that the board, which met in Singapore this week, would seek to put in place measures to prevent a similar rogue trading loss from recurring."
Reputation risk is real. Indeed, reputation can collapse in a relative instant. Think Rupert Murdoch this week. Indeed, his News Corp entity has now been sued by shareholders due to the hacking fiasco.
Also think more broadly about the many politicians who struggle with the reality that image does in fact matter. For example, there was John Edwards with his $400 haircuts - not exactly the stuff of the common man. Now, erstwhile budget cutter Paul Ryan has his image waterloo with two $ 350 bottles of wine. See this and this story about an observant business professor discovering Ryan at dinner and noting that he and his friends were drinking $ 350 bottles of wine with fellow fiscal conservatives (very wealthy ones). Now Mr. Ryan is embarrassed because of the disconnect between perception of his actions, and his website's effort to foster a reputation as a humble, financially disciplined money manager:
He is the Chairman of the House Budget Committee, where he works to bring fiscal discipline and accountability to the federal government. He is a senior member of the House Ways and Means Committee, which has jurisdiction over tax policy, Social Security, health care and trade laws. (emphasis added).
News articles here (best one), here and here are out with news from Italy that the criminal and civil trial for the Eternit asbestos defendants is to start December 10, 2009. The date was set after the trial court denied objections by the defendants, including objections to the location of the trial. The trial will not end quickly - Italian trials in some ways move slowly and include a variety of procedures not directly comparable to American trials.
The criminal and civil claims arise from something around 2,500 injuries and deaths alleged to arise from Italian manufacturing operations of the global Eternit businesses. For more background, a prior post here described the criminal and civil claims being pursued in Italy against former officers of Eternit, and includes links to background articles. There are myriad Eternit entities around the world, and they are not all part of one corporate family. However, most have some roots in manufacturing asbestos-cement products.
The claims and attendant publicity are noteworthy for a variety of reasons. One is that the US media now has company with other global media that devote articles, blogs and websites to "asbestos exposure" and "the dangers of asbestos. " To test the point, try Google searches on "eternit," "schmidheiny" (the last name of one of the defendants) or "amiante" (asbestos). Publicity and fear tend to lead to increased tort litigation.
Another point is that it is increasingly easy for claimant's group to disseminate information that may damage corporate reputation in general and reduce the overall enterprise value. Consider, for example, this website that provides a basic account of the Eternit proceedings and seeks to heap shame on Eternit. Considered in the light of the events of the past year, and this type of an event, one can readily grasp why the SEC has made statements to the media and proposed new rules (go here) regarding public disclosure of the board's role in risk management and the overall corporate risk management strategy.
Update: The Difficulties of Managing Contingent Liabilities - Now James Hardie Is Hit with the Burden of $ 14 Million Verdict for Antitrust Violations
The Australian version of the WSJ has an interesting article by a McKinnsey consultant writing about corporate reputation risk, with the article somewhat tied back to James Hardie. An interesting read.
Contingent liabilities are not easy to manage, as exmplified by this month's events for James Hardie. To begin with, its business is down due to the housing slump. Them its directors this month lost their trial on securities law violations regarding disclosures related to its asbestos trust, and its asbestos trust announced it is underfunded at present. Now comes the word that former subsidiaries of the the company lost a $ 14 million antitrust verdict in Chile, and that Hardie has idemnification obligations for the verdict due to terms of prior m & a transactions. According to the same article, the company has set May 20 to release numbers for its fiscal year end, which was as of March 30.
All of the above is tough enough. Now consider various other implications. One wonders, for example, whether some or all of these events have caused defaults on loan covenants for corporate financing. Even if there are no present defaults, one must wonder what its lenders will be thinking when the company next seeks access to capital or loan markets. Consider also that it will at some point probably need insurance renewals, including d & o coverage. Overall, the point is that contingent liabilities are tough to manage, and the success (or not) of risk managers may be critical to the future of a company.