No reputational penalty for CEOs on environment lawsuits

Monday, 29 February 2016

Chief executives whose companies are embroiled in lawsuits over serious environmental or intellectual property issues either experience no reputational damage or – quite the reverse – find themselves better off, according to research from the University of Adelaide.

In a study of almost 10,000 cases filed in the United States Federal Court over an eight-year period, researchers in the University's Business School investigated the flow-on effect for CEOs after their companies were sued for contractual, environmental and IP lawsuits.

The findings have been published in the Journal of Contemporary Accounting & Economics.

"The concept of reputational damage for CEOs following lawsuits is a fascinating one, and there's been a lot of previous work done on this in relation to securities fraud. But until now, the reputational flow-on effects in relation to other types of lawsuits has largely remained unknown," says Business School Lecturer Dr Chelsea Liu, who conducted the work as part of her PhD studies at the University of Adelaide.

"We found that CEOs who leave their companies after contractual lawsuits often experience poorer re-employment prospects. So in a sense, there is a form of reputational damage or punishment that is reflected by the corporate labour market in these cases," she says.

"However, we were surprised to find that CEOs whose companies were involved in IP lawsuits were on average rewarded with more invitations to join outside boardrooms.

"Additionally, we find no evidence that CEOs whose companies were sued for environmental issues faced any difficulty being hired by other companies, except in the most extreme of cases."

Dr Liu's research was sparked by one such extreme case: the controversy surrounding the BP Deepwater Horizon oil spill disaster in the Gulf of Mexico in 2010.

"The lack of personal reputational damage for CEOs in relation to environmental lawsuits is a major finding and has implications for corporate social responsibility. This raises the question as to whether companies do not really take environmental issues as seriously as the claims made in their corporate rhetoric," she says.

"The increase in board appointments given to CEOs whose companies have been sued for IP issues may suggest that the corporate sector appreciates aggressive, competitive IP strategy, and is willing to reward such behaviour even if it results in legal action."

Dr Liu says little has changed in the legal and policy framework since these 9,959 lawsuits were filed in the US from 2000-2007. "However, more research would be needed to better understand if the reputational issues specific to these types of lawsuits have been impacted in any way by the Global Financial Crisis," she says.

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