No Reputational Penalty for CEOs on Environment Lawsuits, Study Finds
An article from Environmental Leader provides a summary of the study conducted by researchers in the University of Adelaide’s business school. While CEOs in the past did not suffer reputational damage or penalty, Philippe Tesler, CEO of Enablon North America, makes the case that this has changed over the last 10 years.
Here is the Environmental Leader article in its entirety, with valuable insight for executives on the changing attitudes regarding environmental and societal risks.
This could be good news for former Volkswagen CEO Martin Winterkorn, who resigned after the automaker admitted using “defeat devices” in vehicles to beat emissions tests. Chief executives whose companies are embroiled in lawsuits over serious environmental issues either experience no reputational damage or find themselves better off, according to new research.
In a study of almost 10,000 cases filed in US federal court over an eight-year period, researchers in the University of Adelaide’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.
“In this study we find no evidence of any reputational penalty for CEOs following environmental allegations against their companies,” business school lecturer Dr. Chelsea Liu told Environmental Leader. “This means that the executive labor market, driven by the collective actions of corporations in the marketplace, is not inclined to ‘shun’ those CEOs whose firms are accused of environmental violations. This is very different from how the market reacts to allegations of financial fraud —prior research shows that CEOs whose firms are accused of financial fraud do experience significant reputational damage.”
Liu conducted the research as part of her PhD studies at the University of Adelaide. One extreme case — the BP Deepwater Horizon oil spill disaster in the Gulf of Mexico in 2010 — sparked Liu’s research.
“The lack of personal reputational damage for CEOs in relation to environmental lawsuits is a major finding and has implications for corporate social responsibility,” she says. “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.”
While CEOs are still bound by environmental laws, and can be forced to pay legal penalties, the research suggests that there are no additional market-based penalties to crease disincentives for CEOs to engage in conduct that could harm the environment. Liu says this raises — rather than answers — another question: “Given the absence of market-imposed penalties, are the existing legal penalties sufficiently severe and well-enforced to deter future environmental breaches?”
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.
Two cases, though, could cast doubt on those findings.
Former CEO of Masey Energy Don Blankenship in December was convicted of conspiracy to willfully violate mine health and safety standards following the 2010 West Virginia coal mine explosion that killed 29 workers. He faces a year in prison when sentenced in April.
And on March 1 former CEO of Chesapeake Energy Aubrey McClendon, who helped usher in America’s fracking boom, was indicted by a federal grand jury on charges of conspiracy to rig bids for oil and gas leases. On March 2 he died after driving his car at a very high speed into a wall in Oklahoma City. He was supposed to appear in court that day.
Philippe Tesler, co-founder of environment, health and safety software provider Enablon points out the study looks at data from almost 10 years ago. Corporate attitudes are changing, he says.
“If you remember, 2006 was the year An Inconvenient Truth was released, one of the first signals of climate change becoming a mainstream public issue,” Tesler told Environmental Leader. “In the following 10 years, we have seen the corporate world shift their perception of environmental risks significantly, these issues are now top of minds for most CEOs and boards as they are starting to impact organizations much more directly.”
According to the World Economic Forum’s Global Risks Report 2016, released last month, the risk with the greatest potential impact in 2016 is failure of climate change mitigation and adaptation. This is the first time since the report was published in 2006 that an environmental risk has topped the ranking.
Additionally, a study produced by CDP and written in partnership with BSR released in January that analyzed climate date from major multinationals found 72 percent say climate change presents risks that could significantly impact their business operations, revenue or expenditure.
“So slow-burning environmental and societal risks are taking over as of 2011,” Tesler says. “This is a very different environment that what we had 10 years ago, as a result, it’s quite unlikely that a CEO with a tarnished environmental track-record would fare very well today.”
Plus, he says, looking at environmental lawsuits is only half of the story. Research shows a strong environmental sustainability track-record leads to higher share prices and profitability.
“For instance that report from the Commit Forum, based on an analysis of 300 surveys and reports, shows that on average, one third of a company’s name value can come from good corporate citizenship,” Tesler says. “In that context, a CEO would be ill-advised to ignore environmental issues, doing so would lead to lower profits and lower company value.”
Indeed, EHS spending is on the rise. A global survey by Verdantix of 312 EHS executives found that 10 percent of firms will increase spending in 2016 by double digits and 21 percent will spend between 5 percent and 9 percent more next year. Three quarters of respondents expect budgets to increase in 2016, which is an increase from 62 percent who increased spend in 2015.
This shows environmental issues are being taken seriously, Tesler says. “CEOs are investing in sustainability today not for fear of lawsuits, but simply because it makes strong financial sense and increases their company’s brand equity.”