Companies face new risks in the ‘court of public opinion’, says study

Companies should make stakeholder engagement an integral component of their risk management strategies, according to a new study by consultancy SustainAbility.1 The liability landscape is changing such that companies are now facing increased scrutiny in both the courts of law and the court of public opinion.

SustainAbility’s latest study addresses two forms of liability: a "hard" legal liability and a "soft" moral liability.

Legal liability is deepening, says the study, and companies are vulnerable to new forms of legal activism, reflecting the shift by NGOs away from attacking to exploiting legislation.

Moral liability is also developing, the report says, where companies violate stakeholder expectations in such a way as to put business value at risk. "Moral liability may also affect a company’s licence to operate, which depends increasingly on compliance with stakeholder expectations rather than merely with the law."

SustainAbility sees increasing convergence between these two forms of liability as companies come under scrutiny under the law and before public opinion.

Both forms of liability frequently have their origins in social and environmental activism, the report notes. The issues are therefore often delegated - inappropriately - to companies’ corporate affairs or corporate responsibility teams.

"We see the current corporate focus on corporate social responsibility (CSR) and sustainability issues as the first response to moral liability. Much of corporate activity is driven by public relations considerations with reputation protection as the primary driver."

The study calls for a "much more rigorous and robust process of risk assessment and risk management" - and notes that the process could also deliver "market shaping and winning strategies." It concludes: "CSR and sustainability issues for business are the soft signals of hardening liability potential."

The report includes a special study on climate change, which is identified as one of the emerging areas of liability that would not have made the radar screen of companies ten years ago.

"In a carbon-constrained economy, businesses which fail to address their carbon impacts are highly likely to be punished by enforcement of regulation, by penal financial incentives or by market shifts."

The study notes that climate-related litigation is now a reality. US lawyers filed a suit against five major power companies last summer in relation to carbon dioxide emissions. "Though such cases rarely run all the way to judgment, the legal costs and reputational damage associated with defending climate change actions could be enormous." Insurers are already showing concern over their potential exposure, the study says.

Another section of the report looks at the example of Dow Chemical’s exposure to the 1984 Bhopal disaster. Dow acquired Union Carbide in 2001 believing that liability for the disaster was settled and watertight. Numerous stakeholders have, however, worked to argue that Dow carries a moral responsibility to address the serious unresolved consequences (see pp 19-23 ).

"Expectations of corporate responsibility have changed significantly since 1984," says the report. "Perceived failure to act responsibly can leave a company legally innocent but morally guilty in the eyes of society."