Board-Level Concern About Reputation and Legal Risk Driving Changes In Companies' Focus, Behavior

NEW YORK, May 27, 2014 /PRNewswire/ -- Leading international law firm Clifford Chance today announced the results of a global risk study conducted in the first quarter of this year that points to boards of directors and chief executives spending even more time on the growing number of risks affecting their companies. Results show that concerns about reputation now trumps financial performance for US boards, and worries about personal liabilities are making it difficult to recruit board members.

"Safeguarding an organization's reputation is a critical priority for boards and chief executives," said David DiBari, US head of Litigation for Clifford Chance.  "A company's brand and reputation can be one of its most valuable yet most fragile assets.  A dip in financial performance is often forgotten as soon as the market improves, while an event leaving a reputational stain can continue to harm the brand indefinitely."

The study, conducted for Clifford Chance by The Economist Intelligence Unit, is the result of more than 300 interviews with board members and C-level executives of companies with more than a half-billion dollars in annual revenues. Nearly a quarter of the 320 executives responding to the global survey (71) were from the US.

Among US respondents, 68 percent said managing risks to their organization's reputation would only increase in importance in the next two years despite the fact that only eight (8) percent said their companies experienced a major risk incident in the past 24 months.  Underpinning this, more US board members (55 percent) are worried about damage to their company's reputation in the event of a major incident or scandal than are concerned about impact on share price (38 percent) or financial losses (32 percent).

Criminal Exposure now a Growing Worry Among Top US Executives
Among US executives, nearly a quarter of them identified criminal exposure as one of their greatest concerns in the event of an incident or scandal – nearly double the percentage of non-US respondents.  Moreover, 58 percent expressed reluctance to join boards as non-executive directors because of increasing exposure to personal liability.

"The risk of exposure to private suits has long been a concern of individual board members.  Current criminal enforcement priorities that seek to hold the senior-most executives accountable significantly increases this pressure," said DiBari.  "Against that backdrop, a top priority for companies is to implement a robust and effective compliance program that is based on a comprehensive assessment of legal and compliance risks faced by the company."

Despite Heavy Investment, Managing Risk Continues to be a Challenge
The study shows that despite heavy investments made by boards in the past two years, managing risk continues to be a challenge – especially for multinational companies.  Nearly two-thirds of global respondents (64 percent) agreed that ensuring a uniform approach to managing risk is made more difficult by the cultural differences that exist across an organization's international operations.

Another challenge for boards is identifying and determining which risks should receive the most attention in the face of new and evolving threats.  For example, 57 percent of global respondents said they are worried about the prospect of a cyber-attack; however, only 15 percent said it's a current focus, as more traditional concerns like financial and legal risks continue to require a good deal of attention. 

Perhaps due to the increasing number of risks requiring attention, 82 percent of US respondents said more time has been invested in risk management by their companies' boards during the past two years, with 86 percent reporting their companies to be much better equipped to address the principal risks facing their industries.  Still, the vast majority (92 percent) said their boards have appointed, or will appoint within two years, non-executive directors with expertise in dealing with specific risks facing their organizations.

Boards Continue to be Tested by Global Sanction Compliance
Another theme that emerged is the growing challenge of complying with US economic sanctions administered by agencies like the Office of Foreign Assets Control (OFAC).  Due to legal, commercial and reputational risks, more than 60 percent of US respondents said their companies were concerned about an incident or scandal arising out of sanctions or restrictions on trade. 

FCPA – or the Foreign Corrupt Practices Act – presents similar risks.  Recent settlement or penalty amounts have hovered in the hundreds of millions of dollars and have been accompanied by both reputational harm and business disruption.  The recently enacted Dodd-Frank whistleblower provisions have increased the risk of FCPA enforcement, with 150 of the tips and complaints registered with the SEC in 2013 involving FCPA issues.

"Executives can be held personally liable for FCPA criminal violations even where they had no direct involvement in or knowledge of the conduct in question," said Clifford Chance Litigation partner Edward O'Callaghan, a former federal prosecutor who was co-chief of the Terrorism & National Security Unit for the Southern District of New York.  "It is critically important for the organization's leadership to take a proactive approach to compliance, insisting on periodic assessments that consider a number of factors to identify high-risk jurisdictions, business units and projects."

Conclusion
The results of the Clifford Chance survey show that companies across the world have made substantial investments in risk management in recent years and that it continues to be a top priority for US boards and C-level executives.  However, the results also indicate more work needs to be done.

As regulations mount and extraterritoriality expands, managing risk is becoming increasingly complicated for large companies.  Yet, just 27 percent of global respondents said risk management is currently flowing below the management level and only 33 percent have made it a measurable element of staff performance. 

"In this post-financial crisis era, earning trust back has become a key priority for companies worldwide – that was a point made by 72 percent of our respondents," said Jeremy Sandelson, global head of Litigation for Clifford Chance. "Ultimately, everyone in an organization is responsible for conducting business in an ethical and compliant manner.  But the standards, the expectations and the tone must be set, driven and embodied by a company's board and C-level executives – it all starts at the top.  Based on the overall responses to our survey, company leaders worldwide are aware of that."

For further information about Clifford Chance see www.cliffordchance.com

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SOURCE Clifford Chance