What top personalities can teach us about reputational risk

Papa John’s Pizza founder John Schnatter, comic Roseanne Barr, movie mogul Harvey Weinstein, chef Mario Batali, and before that, Uber’s Travis Kalanick: the “hits” (to reputations) just keep on coming.

The list of big names and the enterprises linked to them that have foundered or worse because of flawed conduct — or allegations of it — goes on and on these days. Now it’s CBS Corp.’s CEO Les Moonves facing accusations of past sexual misconduct. This week, NASCAR’s CEO took an indefinite leave of absence after being arrested and charged with DUI and drug possession charges in New York.

The accelerant of social media is making it even harder to stamp out the flames of scandal than in the past, lawyers and crisis-management specialists say. Crises that used to take days to build in the news media ignite instantly thanks to Twitter, Instagram and Facebook. At the same time, it seems the number of corporate brands built around real-life personalities such as Batali or Schnatter are rising, presenting ever more possibilities for trouble.

So what can in-house counsel do to prevent, prepare for and mitigate the next calamity brought on by a bad tweet, a viral video, a revelation of disgraceful personal misconduct, or worse?

“Increasingly, reputational issues are falling within the purview of general counsel because if there is a problem, it becomes a legal issue very quickly,” said attorney, consultant and author James F. Haggerty, president and CEO of strategic communications and litigation firm PRCG.

Lawyers who are experts in dealing with these types of matters say better due diligence along with thoughtfully drafted contractual clauses, appropriate insurance and planning can lessen the risks for companies whose brands are closely associated with an individual talent, executive or endorser.

Related: #MeToo wave has employers (and their insurers) running for cover 

Protection by contract

Aside from conducting thorough due diligence on the principals, general counsel can avoid trouble through the use of contracts that include carefully drafted morals clauses, several experts said.

While morals clauses in employment agreements with Hollywood entertainers have existed since at least the 1920s, they have renewed importance in the #MeToo era. The clauses spell out what kinds of events or behavior would trigger the termination of the contract with the talent, executive or endorsement personality.

Greenberg Glusker partner Schuyler Moore, a partner in Los Angeles who practices entertainment and corporate law, said, “particularly when you are building a brand around a personality, you have got to build a morality clause into each contract. This gets into the issue of public opprobrium and perception in the public eye.”

Morals clauses should also be considered in agreements with startup founders, said Michael Marra, co-regional managing partner at management-side labor and employment firm Fisher & Phillips in New York. Marra, a former associate general counsel at a public advertising company, noted, “if someone is about to invest $100 million to help a company to grow, that is really the place to think about morals clauses, especially since the reputation of a key person is so closely associated with brand identity and success.”

“For example, if you are a media company and you do business with lots of other public-facing media companies and advertisers, you may want to have clauses in executive agreements, if executives are really bound up with the brand, that not only say you can’t sexually harass someone, but also say that our company is still growing and you can’t have sexual relationships with anyone in the company,” Marra said.

Related: Sexual harassment and insurance: Are your clients’ businesses covered?

Deciding what would trigger a termination requires particular attention when drafting these clauses. “First, what is the test? Is the test that the person is subject to public opprobrium? Do you have to do a poll? Who decides if the test has been met? When do those events have to have occurred? Many of these events that are alleged to have occurred happened prior to the contract. It depends on the wording of the contract,” Moore said.

He recommends that general counsel “put in a very broad morals clause, triggered by press reports of events that hold the person up to public opprobrium or ridicule or disrespect.”

In-house lawyers also need to give careful thought as to who within the company is responsible for enforcing the clauses, whether that is a supervisor, division head or board of directors.

But as Marra noted, “you have to also be well aware that if you have a clause and you don’t act on it, you may as well not have it at all. Then you are a hypocrite.”

On Wall Street, so-called Weinstein clauses are similarly being added to some merger agreements requiring companies to vouch for their executives’ prior behavior and requiring them to pay a breakup fee if the deals have to be scuttled because of problems, according to Bloomberg News. Bloomberg reported that at least seven deals so far this year have included such clauses.

Within morals clauses, general counsel also should consider defining limits on social-media activity, said Haggerty.

“When a personality is associated with a brand, there should be clear guidelines on what the personality can comment on,” he said. “There should be clauses about what other sponsorships and brands you can promote, but also rules about what you can say about political issues and others so there is no confusion about the parameters of public comment.”

Of course, attorneys representing the personalities in these negotiations are likely to push back against these tough provisions, which is why Moore says these clauses have become “a very contentious issue” in Hollywood and elsewhere.

Related: Insurance agents and online reputation management

The 3 Ds: Death, disability and disgrace

Another way that legal departments can defend the company from reputational risk around a leader or other highly public company figure is through smart insurance usage.

The first step, according to Mikaela Whitman, an insurance recovery practice partner at Pasich LLC in New York, a boutique firm representing many movie studios, is to examine existing liability insurance policies.

“Generally speaking, they should be taking stock of what insurance policies they have in place that could potentially provide coverage for claims like Roseanne Barr making statements on Twitter. They submit the claim through all liability policies they have even if they don’t think the policies will cover it,” Whitman said.

In-house counsel should work with the risk management department to examine all policies already in place. If brand sponsors are using social media and the company is at risk for what they write on the internet, examine which policies might cover that, and what exclusions might apply, she said.

Buying disgrace insurance is also an option. “Disgrace insurance can either be a stand-alone policy, or it can be part of a package policy and if it is a package, it is part of death, disability and disgrace coverage—the three D’s,” Whitman said.

Disgrace insurance is not a standard coverage but usually must be requested from a broker. Policies can cover the direct costs to replace a personality, and reimburse the money that was spent to acquire her and replace her in a marketing campaign.

Disgrace coverage has been around for decades but became increasingly popular after about 2010, when Tiger Woods’ sex scandal and others resulted in several athletes’ endorsement contracts being canceled, said Whitman.

Two newer forms of coverage, crisis management insurance and reputation risk insurance, can provide coverage for business losses from negative publicity. Crisis management insurance typically pays for the hiring of a public relations firm, and reputation risk insurance covers actual business losses suffered as a result of negative publicity.

Like disgrace insurance, these are specialized policies and the type and scope of coverage can vary.

For example, said Whitman, depending on policy wording, these policies may or may not cover sexual misconduct-related events, so they must be carefully scrutinized. If there is a morals clause in the employer’s contract that is in any way linked to the insurance policy, the two clauses should be examined side-by-side to make sure there is no gap in the coverage, she added.

Ironically, noted Whitman, it can be more difficult to price the premium for a policy insuring a personality with a squeaky-clean reputation than one with a tarnished image, because of the risk attached to the unknown.

Related: 10 ways to protect against sexual harassment in the workplace

Quick action

Finally, if controversy does flare up, counsel must react quickly and urge others in the company to do the same.

“There needs to be a clear coordination between the company and the face of the brand,” Haggerty said. “Preliminary research suggests that generally if the face of the brand apologizes first, it has a positive impact on the crisis and the company’s reputation. If the company is forced to apologize on behalf of the spokesperson or brand ambassador, it can accelerate the crisis further.”

Counsel today also must be prepared to react to sudden exposure of long-buried deeds, according to Haggerty. “In some instances it is unfair to dredge up things that were said in another time and another context, but as general counsel you need to understand that this is the current climate. Unfortunately, there can be overreach at times, but a decisive reaction is needed in all instances when bad things do come out,” he said.

Internal communications with employees also must be swift and coordinated to avoid internal dissension and morale breakdown, said Marra. “You can do a lot of unforeseen damage by not communicating with your employees.”

And advance planning can be critical.

“There has always been a sense in corporate America that if I think and plan about a problem, it might happen. It is almost magical thinking. They don’t confront an issue until it is ripe in the courts. They won’t even look at an issue until it becomes ripe. But it is a fine line between when an issue is ripe and when it turns rotten,” Haggerty said.

Related: 22 tips for insurance agents & brokers on maintaining a good reputation

MP McQueen is editor-at-large for law.com, and she can be reached at mpmcqueen@alm.com.