“If I haven’t done anything wrong, I don’t need liability insurance.”
That was a common assumption for a typical pharmaceutical company director until an explosion of lawsuits in the late 1980s spurred companies in all sectors to seek Directors and Officers coverage. Today, company leadership is facing a new type of risk – one that’s forcing them to consider their own potential for serious financial losses when their company’s reputation comes under fire.
In the last six years, personal risk levels to directors and officers at public companies have been rapidly rising, and Mylan’s CEO Heather Bresch is just one recent example of a company leader to face personal criticism in the political and media arenas. And when President Trump said that the pharmaceutical industry was “getting away with murder” and that “I’m going to bring down drug prices...I don’t like what’s happened with drug prices,” stock prices dropped across the industry.
That week, the equity values of the 26 largest pharmaceutical companies underperformed the S&P500 by 14.5% (immediate $230 billion loss) relative to a baseline eight weeks earlier. Eight weeks later, in the face of a stock market boom, the reputational damage to the pharmaceutical industry was persisting as expectations for future sales revenues were down an average of 4.42%, quarterly operating margins were down 1.53%, and equity values were still underperforming the S&P500 by 11.4% (a persistent $180 billion loss). Results like these present an attractive invitation to activist investors, who focus on short-term tactics and, often, the ouster of board members.
Why is this happening now? What’s the true risk for companies in the pharmaceutical industry and how will their directors and officers be affected?
New research shows an upward trend in generalized public anger towards large institutions. This public anger is looking for targets and there is no shortage of political figures willing to exploit it by setting their sights on a prominent company in a recognizable field that they think they understand – like pharmaceuticals.
Combine that with the weaponization of social media and news, allegations and rumors – whether true or false – can have a devastating impact. Even board members who usually stay out of the limelight and are unknown to the mass public are now being affected as this targeted anger searches for individual sacrifices and culpability.
Social media, simultaneously the chosen outlet for public anger and the tool for building brand equity and customer loyalty, cuts both ways. Pharmaceutical companies should be vigilant about outsized expectations and reputational backlash when managing their social media presence, but unlike corporate reputations, which often bounce back from damage, attacks on personal reputations are much more difficult to repair.
Regardless of whether reputational damage is deserved or not, it can be quite significant. On average, a typical director earns about $250,000 a year for each corporate board they serve on and most serve on multiple boards. If the board’s oversight of the company comes under attack and the resulting reputational damage forces a director to resign, the financial loss usually does not end there. Reputational damage can turn a director into a professional pariah, which if he or she becomes less desirable to the other corporate boards, usually means millions of dollars in losses over the course of a career.
Despite the rapidly rising levels of risk, many company leaders still wonder why they need insurance if they haven’t done anything to damage their reputations.
A new research study from Steel City Re looks at 60 million data points for 7,500 public companies over the five-year period between 2011 and 2016, and it shows that pharmaceutical companies and their leadership are up against quite a lot:
• Losses linked to reputational damage at public companies have increased by 461% over the past five years.
• Losses experienced due to reputational issues directly correlate to increases in generalized public anger as demonstrated by angry posts on social media.
• Social media has become weaponized as a result of its speed and penetration, combined with the heightened level of generalized societal anger seeking outlets on which to vent.
• Outsized expectations by investors about corporate performance, often exacerbated by stock buy-backs that raise stock prices short-term, have created increased vulnerability and potential for losses when companies are attacked.
These are the new realities we face in our world today – false tweets that can become internet phenomena, people who read more fake news than real news and elected officials who exploit social media and public anger to pressure high profile brands into behaving how they want. Pharmaceutical companies, like other industries, are not immune to these trends, and their leadership should bring reputation, and the tools that can protect it, into the board room as a strategic priority.
About the Author
Dr. Nir Kossovsky is CEO of Pittsburgh-based Steel City Re, analyzes the reputational strength and resilience of public companies and provides insurance products that protect those companies, their officers and directors against financial losses that occur when reputational crises hit.