Boards Must Create Communication Systems to Safeguard Reputation

As a corporate scandal unfolds there is inevitably a drop in share price and a decline in overall firm reputation that ripples to all activities including consumer confidence and the ability to obtain financing. The decline in value of News Corp. stock is just one current example. Corporate boards of directors may be accountable to shareholders if they fail to adequately exercise adequate oversight, particularly if this failure violates the duty of loyalty that directors have to the corporation. While reputation is not a physical asset, directors are accountable for the proper oversight of all corporate assets.

A fundamental question is what kind of reporting or informational pipeline exists to inform the board of directors that corporate reputation is at risk. As widely reported, a group of Johnson & Johnson shareholders recently sued directors and officers based upon the reputational damage that the firm has suffered. While this litigation is still pending in federal court, can other similar suits be far behind?

Those responsible for corporate governance should not have to state that they did not know of illegal or tortuous conduct occurring at the operational level. Rupert Murdock and James Murdock have denied knowledge of confidential out-of-court settlements paid to some victims of phone hacking. Taking these statements as accurate, the question remains why this information did not come to their attention?

Directors and those responsible for corporate governance must create clear standards of conduct, enforce these standards, and have reporting and communication mechanisms in place that without exception moves accurate and timely information impacting corporate reputation and integrity up and down the corporate ladder. Failure to do so may irreparably damage the reputation of the corporation as well as that of the directors and officers, and place them at risk of shareholder suits.