Corporate Governance in the Era of Cancel Culture: Navigating the Legal & Financial Implications for Businesses
In today’s digitized world, all it takes is a second for your reputation to be made or marred. One misstep or poorly perceived (let alone written) opinion will land you in hot water in no time, and has the potential to generate public outrage at a massive scale. Popularly known as ‘Cancel Culture’, this trend gained traction in the late 2010s and early 2020s; and refers to a form of social ostracism wherein someone is shunned due to their stance and opinions on a particular situation. While cancel culture has dethroned questionable public figures from their pedestals of fame, it has slowly yet surely made its way to the corporate sector. Directors and executives must act cautiously, as failure to do so can cause serious damage to the reputation of a company, while also potentially exposing it to lawsuits and investigations. This article is an attempt to analyse the impact of cancel culture on corporate governance, along with the legal and financial ramificationsfaced by affected businesses.
The Link Between Corporate Governance and Cancel Culture
Corporate governance, as we have known it, traditionally encompasses the practices governing a company’s policy and operations, stakeholder relationships, legal and regulatory compliance, fairness, transparency and accountability. However, with social media emerging as a powerful tool for dissemination of information and subsequently, public scrutiny; we are witnessing what can be called a convoluted relationship between corporate governance and social media. Employees, stakeholders, and consumers now expect companies to uphold a certain level of morality and ethics. For instance, endorsing a morally corrupt individual or ‘siding’ with a supposed oppressor can directly translate into huge public backlash.
Since we’re talking about public backlash, it becomes important to acknowledge the ripple effect and how it can destroy not just your reputation, but also leave long-lasting financial consequences. Once a certain narrative gains visibility and traction on social media, it is bound to spread like wildfire, thereby impacting the prospects of a company. Some of the aforementioned consequences include increased regulatory scrutiny, shareholder disputes, fluctuating stock prices, and leadership changes, to name a few.
To cite some real life examples demonstrating the linkages between corporate governance and cancel culture:
• Renowned sportswear brand Adidas dropped the now infamous rapper Kanye West over his anti-Semitic remarks made in October 2022. West’s remarks led to the brand receiving massive backlash, prompting the latter to terminate the partnership and subsequently incur losses to the tune of $1.3bn in inventory write downs.
• Popular coffee brand Starbucks faced severe backlash from the general public in the backdrop of the humanitarian crisis in the Gaza Strip, when it was discovered that they allegedly fund Israel. The brand resorted to damage control by slashing beverage prices, but it didn’t quite do the trick.
In both of these scenarios, the board members were forced to intervene in order to protect the brand name and shareholder interests: all thanks to public sentiment.
Legal Risks Associated with the Cancel Culture Crisis
When people think of cancel culture in the context of businesses, they most likely think of loss of brand value and/ or reputation to be the only implication. However, there is much more at stake, including legal consequences such as:
1. Claims as against Breach of Fiduciary Duty: In times of crisis, it is very much possible for directors to land in a soup; since it is the duty of directors to act prudently in order to preserve the brand name and value.
2. Shareholder Suits: In consonance with the foregoing point, it is very much possible for the shareholders to sue directors and other managerial personnel on grounds of company mismanagement and the subsequent losses incurred due to plummeting share values.
3. Investigations to Check Regulatory Compliance: When a company is already under public scrutiny, it doesn’t take long for official investigations to be launched (in more severe cases) which can in turn reveal legal and regulatory non-compliances.
4. Employment & Labour Law Related Risks: Last but definitely not the least, companies often resort to swift termination of employees to distance itself from the backlash. However, it can easily backfire in the form of lawsuits pertaining to unlawful termination.
How can Companies Prepare: Internal Policies & Response Strategies
Dealing with crises like the one we’re talking about, good corporate governance strategies can act as game changers for companies. First and foremost, it is crucial for companies to adopt good corporate governance strategies to maintain trust and genuine, long-term relationships with stakeholders. In addition, having in place robust policies meanprioritising the aspects of inclusion and diversity. Some other routes for companies/ businesses to safeguard themselves legally, include:
1. Regular Updation of Internal Policies
Companies should review, and if necessary, update their internal policy framework on a periodic basis to ensure that the policies are in line with compliance standards, and do not contain any loophole which could heavily cost the company during times of severe public backlash.
2. Appropriate Response Strategy
Is your company facing widespread backlash due to something problematic said or done by the officers and/ or employees? In the face of such problems, it becomes crucial to have in place a proper, well-prepared response strategy. From social media posts to cease & desist notices, having a plan of action can make things easier for an already struggling company, much more simplified.
3. Proper Documentation
From board resolutions to minutes of meetings, and policies to contracts; it is extremely important to have everything on record. This makes it easier to trace the accountable person during the course of legal proceedings. The scope of documentation also extends to risk assessment
4. Transparency and Accountability
Saving the best for the last (and the most obvious), transparency and accountability are two such principles which cannot be compromised on, no matter what the situation might be. These two principles are essential not just for building long-term trust, but also mitigating the consequences which might result from missteps in the public eye. Moreover, they should more particularly be upheld while dealing with associates and third party vendors to safeguard the interests of your company during times of trouble.
Conclusion: Striking a Balance
Now that we’re aware of the possible roadblocks and the routes to navigate the same, let’s address the elephant in the room: how should the leadership act when in crisis. While recklessness often results in more harm than good, simply waiting for the flames to die down while doing nothing can also have a detrimental affect by making you look ignorant. So, how to strike a healthy balance between the two? The recipe to balance includes having sound legal backing, being diverse (not just in terms of race and gender, but also in terms of perspective), undertaking due diligence at regular intervals, building trust with stakeholders, and maintaining compliance with regulatory standards.
Cancel culture is no longer a pop culture term; it has the potential to turn the tide around for your company in a matter of seconds. Executives do not really have a choice anymore. They can either adapt with the flow of things, or get swept away with the waves. Having a robust corporate governance structure ensures that the said executives, and the company itself do not expose themselves to major risks: legal as well as financial. The ones who act cautiously and adopt good governance policies can go a long way by building a stronger base which can stand the test of the ever-so-uncertain global landscape.
