Responsibility of Leadership
THE NEW QUID PRO QUO
transmission line. The oversight cost 86 lives, and Pacific Gas and Electric was ordered to cover the $2.5 billion settlement.
From Turner Brothers Asbestos covering up the dangers of asbestos in the 1900s to the Enron insider trading disaster of the early 2000s, corporate misdeeds have existed for as long as the corporations behind them. However, what were once rare, high-profile stories have become everyday reports. In 2018, the Securities and Exchange Commission received over 5,000 whistleblower reports, primarily from company insiders who identified illegal behavior. This was a new record, one that reflected the change in public perception. Marc Goldstein, head of U.S. research at the proxy advisory firm Institutional Shareholder Services, stated that, “More people now would agree that directors have a responsibility not just to ensure that companies comply with the law but also to meet broader societal expectations.” What are these social expectations? They are wide and difficult to pin down, encompassing environmental, social, and governance (ESG) standards. ESG risks include, but are not limited to, a company’s impact on the environment, general or racial inequality, community involvement, and choice of board members. Public demands to adhere to ESG standards have translated into high-profile lawsuits. In 2015, Blue Bell Creameries’ ice cream was linked to a deadly listeria outbreak. Since then, a shareholder derivative lawsuit targeted board directors of Blue Bell Creameries for allegedly failing to enact measures to protect the company’s ice cream products from contamination. Another major lawsuit followed the catastrophic Camp Fire in Paradise, California. The deadly wildfire was the result of natural gas giant Pacific Gas and Electric delaying a safety overhaul of a high voltage Have a Laugh!
It’s not just court cases that come calling when leadership fails. Social crusades, whether they be informal employee walkouts or organized efforts like the #MeToo movement, have called many individuals and companies to task. These movements have called social shame on powerful people accused of sexual harassment, like film producer Harvey Weinstein, and of racism, like Papa John’s founder John Schnatter, as well as the companies that would protect them. Google’s parent company, Alphabet, recently found itself in hot water after it was revealed three Google executives received a sizable severance package after being accused of sexual misconduct. Alphabet’s board of directors were accused of maintaining a “culture of concealment” that led to “cover-ups of a long-standing pattern of sexual harassment and discrimination by high-powered male executives.” These social changes are not isolated to outed CEOs or one-time settlements. The real effect of cases made against companies and leaders who fail to adhere to ESG standards have resulted in the rates of director and officer (D&O) liability insurance increasing by 5–20%. When assessing risk management, companies need to broaden their terms to include ESG risk. Care and caution must be exercised regarding leadership integrity and management culture. The public message is clear: Companies that fail to do right by their employees, their clients, and their communities will be held accountable.
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