What the Purdue Pharma Case Teaches Us About Reputational Tornadoes

February 19, 2019

Purdue Pharma and its corporate leadership featured prominently in the media recently as litigation mounts over their sales and marketing of Oxycontin. Nir Kossovsky offers some observations about the lessons this situation provides for all corporate leaders responsible for their companies’ reputations.

Purdue Pharma and its corporate leadership, the Sackler family, have been prominently featured in the media recently as litigation mounts over their sales and marketing of Oxycontin. While we have no inside information about these allegations, we do have some observations about the lessons this situation provides for all corporate leaders responsible for their companies’ reputations.

My firm is in the business of analyzing, underwriting and insuring corporate reputations and has been analyzing the reputational strength of companies for decades. What effective risk managers have come to realize is that reputation is based on the expectations of stakeholders. When performance aligns with those expectations, reputation creates value and is resilient. When stakeholders are disappointed and angry over a company’s performance, reputation value is destroyed – and the company’s finances and operations suffer along with it.

But how do you measure reputation value? How do you define the universe of stakeholders? How do you understand their expectations?

Stakeholders comprise the social environment within which a company operates; their forward-looking expectations create reputational value, which is realized in such things as stock price, cost of capital and sales margins. This is a dynamic environment, requiring reputation risk managers to be attuned to changes in conditions – much as they would be in connection with more visible changes.

If, for instance, a company were to decide to move a facility from a shielded valley to a plain susceptible to tornadoes, risk managers would immediately recognize that the firm’s risks had changed and adopt new practices to protect its products, its assets and its employees. It wouldn’t wait until the tornado appeared on the horizon to think about the implications that could have to its business, and to build appropriate shelters.

In the case of Purdue, it appears as if they failed to recognize quickly enough that, at some point, their stakeholders – and the expectations of those stakeholders – changed. They were focused on producing results – sales – that would satisfy one group of financial stakeholders. They believed they had met the expectations of their regulatory stakeholders – the FDA – given that their products had been approved. Physicians – also stakeholders – apparently found Purdue’s products to meet their expectations as they continued to prescribe them, at least up to a point.

But then, everything changed. Suddenly, elected officials at all levels became stakeholders. Local health organizations and nonprofits became stakeholders. Additional regulatory and law enforcement agencies became involved. All their expectations were different. And then, the expectations of existing stakeholders – from physicians to regulators – changed. Addiction had become a crisis in America, opioids were part of it, and Purdue was at the center of opioid sales.

Judging from the media accounts, stakeholder expectations were changing rapidly, and the company’s culture, and push for increased sales, was changing slowly. They didn’t seem to realize that they had suddenly landed in the middle of a tornado zone.

That is an important lesson. Because reputational risks can take sharp turns, companies need to reevaluate them constantly, considering and reconsidering who their stakeholders are and exactly what they expect. One day, boards shrug and look away from a sexual harassment issue; the next, the #metoo movement is causing some of them to be humiliated publicly and become commercially toxic. One day, selling legal firearms is a good business; the next, a mass shooting results in guns being pulled from store shelves and relationships with the NRA being severed. One day, your sales force is selling with gusto a fully-approved, doctor prescribed medication; the next, you’re portrayed as the face of a national addiction crisis.

On top of that, we now live in an era where individual villainization seems to have become a cultural necessity. Whether it’s politicians convening public hearings to castigate executives and board members, or pseudo grass roots social media campaigns that give rise to prominent media headlines, individual members of corporate leadership are in the crosshairs. 

That situation is being exacerbated by a new Department of Justice policy that: “pursuing individuals responsible for wrongdoing will be a top priority in every corporate investigation.” Now, when a corporate misstep occurs – whether it’s a failure of systems, processes, personnel or leadership; whether the issue is a symptom of an enterprise-wide problem or a group of rogue employees; and whether the trigger was accidental or malicious – government prosecutors are going to be looking for individuals to blame.

The lesson: CEOs, boards and their advisors must use the full force of their companies’ enterprise reputation risk management apparatus to shield the innocent or marginally culpable and to protect the assets of the firm, including corporate leaders. When a legal crisis hits, every board member and every member of the leadership team is now going to have to ask themselves not only: “Did I do anything wrong?” but “Am I vulnerable? Will others point their finger at me? Can I make a convincing case that I did everything reasonably possible to prevent this situation from occurring-or to facilitate its being uncovered?” And last, were something untoward to happen notwithstanding earnest governance and risk management, do they understand the magnitude of the potential reputational value losses and have they factored them into their value-at-risk models? Their legal exposure and, equally important, their reputational exposure will depend on the answers to those questions.

Traditional D&O coverage won’t help them. However, strategically deployed third-party warranties and outside validation of good governance will go a long way toward establishing their credibility – showing that they had engaged objective outsiders to conduct analysis and that those objective third parties had not only attested to the company’s governance but backed their opinions with insurance products-what some have described as “warranties on governance.”

In this new environment, fueled by generalized public anger and anxiety, where social media gives any protagonist the ability to launch a tornado-like whirlwind against virtually any target, companies need not only to look into the future, but to adjust their telescopes frequently, constantly reconsidering who their stakeholders are and what they expect. And they need to protect not only their corporate reputations, but their own.

Dr. Nir Kossovsky is CEO of Steel City Re.