No Reputational Penalty for CEOs on Environment Lawsuits, Study Finds

This could be good news for former Volkswagen CEO Martin Winterkorn, who resigned after the automaker admitted using “defeat devices” in vehicles to beat emissions tests. Chief executives whose companies are embroiled in lawsuits over serious environmental issues either experience no reputational damage or find themselves better off, according to new research.

In a study of almost 10,000 cases filed in US federal court over an eight-year period, researchers in the University of Adelaide’s business school investigated the flow-on effect for CEOs after their companies were sued for contractual, environmental and IP lawsuits. The findings have been published in the Journal of Contemporary Accounting & Economics.

“In this study we find no evidence of any reputational penalty for CEOs following environmental allegations against their companies,” business school lecturer Dr. Chelsea Liu told Environmental Leader. “This means that the executive labor market, driven by the collective actions of corporations in the marketplace, is not inclined to ‘shun’ those CEOs whose firms are accused of environmental violations. This is very different from how the market reacts to allegations of financial fraud —prior research shows that CEOs whose firms are accused of financial fraud do experience significant reputational damage.”

Liu conducted the research as part of her PhD studies at the University of Adelaide. One extreme case — the BP Deepwater Horizon oil spill disaster in the Gulf of Mexico in 2010 — sparked Liu’s research.

“The lack of personal reputational damage for CEOs in relation to environmental lawsuits is a major finding and has implications for corporate social responsibility,” she says. “This raises the question as to whether companies do not really take environmental issues as seriously as the claims made in their corporate rhetoric,” she says.”

While CEOs are still bound by environmental laws, and can be forced to pay legal penalties, the research suggests that there are no additional market-based penalties to crease disincentives for CEOs to engage in conduct that could harm the environment. Liu says this raises — rather than answers — another question: “Given the absence of market-imposed penalties, are the existing legal penalties sufficiently severe and well-enforced to deter future environmental breaches?”

Liu says little has changed in the legal and policy framework since these 9,959 lawsuits were filed in the US from 2000-2007. “However, more research would be needed to better understand if the reputational issues specific to these types of lawsuits have been impacted in any way by the global financial crisis,” she says.