News and rumours travel fast in today’s social media era, meaning reputational damage can spread like wildfire. LACCA talks to in-house lawyers about how legal teams play a vital role at a time of crisis, and why preventative measures are the best way to protect a company’s reputation.

From the infringements of indigenous rights, to faulty products, to ill-construed marketing campaigns, companies all face risk of reputational damage, regardless of the industry in which they operate. In Mexico, convenience store chain Circle K recently had to offer a public apology after publishing an online advertising campaign that was widely criticised as sexist. The campaign, which has now been withdrawn, was centred on the celebration of Secretary Day, and encouraged the purchase of a special combination of wine, chocolate and condoms for a special price, which many condemned as an unfair stereotype of women and secretaries. Circle K did not respond to LACCA’s request for comment on the matter, but the incident has given pause for thought over the role legal teams play when crisis hits.

When a company finds itself in hot water and its reputation is on the line, there is a need for speed to contain and mitigate the problem in the technological world we live in. “In today’s interconnected world, public, political, and social judgment in one market or region often defines activity in another, since networks of regulators, researchers, activist groups and consumers drive debate across boundaries,” says Denise Guillen, vice president of legal for Latin America at IT company Nielsen Holdings. 

Reputational damage comes in many forms, but all can lead to the worst-case scenario of bankruptcy for any company. By bringing in the legal team early, a company can reduce the worst of the risk. “It’s always better to prevent a forest fire, but if a forest fire does happen, it’s always better to have a predefined and approved plan of attack, says JP Cueva, general counsel and business development director at investment group Finadai Holdings.   

Johnson & Johnson’s response to the death of seven people in 1986, after they consumed contaminated Tylenol produced by the pharmaceutical company, is often heralded as an example of excellent planning and decision-making from a company in crisis. It recalled Tylenol from every store across the United States, rather than just in Chicago where all the deaths took place, at a time when product recalls were generally unheard of. The reputational and economic damages that occurred as a result of the tragedy could have been irreversible, but the company’s swift and decisive action is what saved it from going under. “Their quick response, in line with its clear principles, was rewarded with customer trust, so much so that, within five months of the disaster, 70 per cent of its market share for the drug was recovered and continued to improve overtime,” says Nicolas Ruiz, legal and corporate affairs director for Latin America at healthcare group Falck. “It’s clear that having a guideline, preparation and taking quick action is key to manage any reputational damage.”

Prevention as the best form of defence

In-house lawyers across the region agree that a prevention strategy is the best way to minimise reputational risk and legal teams should be spearheading the approach. “Legal and compliance teams should be seen as the link between senior management and the rest of the employees, as they are the teams that should be the first ones to know the risk exposure of their company,” says Jorge Luis Gonzalez Beltran, legal and contracts manager at aerospace company Thales Group. “In most cases, the reputational risk is right under a company’s nose, but no one says anything because they don’t know who to tell; the legal team should be the team they trust in.”

The sooner the legal team is involved in crisis management and prevention, the better. They should be in the room when a company is creating its prevention strategy, and not just when crisis hits. Roberto Imaz, corporate counsel at the Mexican branch of automotive manufacturer American Axle, says; “Convince your internal clients that support from the legal team really does help everybody. Make sure your corporate headquarters empower you, as legal, to be included.”

Policies that provide a more tailored approach to reputational risk across all business functions will leave companies in a stronger position to isolate a problem faster and stop it getting further out of hand. “Risk is addressed in specific policies we have, since each policy assesses the reputational damages that may arise. For example, our antitrust policy considers reputational damage in cases of investigations or sanctions by the competition authorities,” says Quiros. “This way, it allows us to view all the different reputational risks in the company and establish the appropriate controls and procedures to respond to an event.”

All the responsibility does not lie with the legal department alone, however; a collaborative effort involving multiple departments is far more likely to succeed. Marisol da Silva, head of legal at media company Kantar, notes the importance of coordination between the legal and public relations teams. “Legal must assist them with the responsiveness and the right tone to be used in every message or clarification the PR team publicises, in order to avoid elements that can bring even more damage to a company’s reputation,” she says. “Legal need to check answers, explanations and advertisements or any material where the company’s name or trademark might appear.”

Business legal director at Banco Sabadell, Luis Alberto Cardenas Diaz, agrees. “You should also provide all necessary assistance to the communication department, among others, explaining, in the simplest possible way, the legal problems faced by the company.”

For Gianmarco Tagliarino, vice president of corporate affairs and transactional structuring at real estate conglomerate Breca, the auditing, corporate affairs and HR departments are key allies for legal when reputational damages are concerned. “Work with auditing, because they are the ones that will help you plan all of the internal regulations to avoid reputational damages; corporate affairs are in charge of the company’s reputation and will deal with any external communications and with any event that would potentially damage the reputation; while HR can help you create a culture that mitigates any incorrect action.” The legal team should also be consulted when the company designs new products or services.   

Creating a culture that mitigates risk and reduces the likelihood of reputational damage also requires buy in from employees, who are seen by many as the most important vehicle of good reputation. “It is key that the code of conduct of any company is embedded within the DNA of all its employees, so they don’t have to think twice before making any decision – so, when in doubt, they will know how to act in accordance with company standards,” says Ruiz.

For those companies that do not have clear policies or protocols in place for dealing specifically with reputational damages, Benedito Villela, legal manager at Nors Brasil, advises any legal department to head straight to a high rank executive at the company - most likely someone from the C-Suite - to find out who is the first response in a case of reputational damages. "From that point on, it becomes easier to establish a plan to prevent and react to reputational damages, with a reputational protocol that fits the companies individual profile," he adds. 

Get outside support

When crisis does strike, external advisers can be vital to give a company the best chance of emerging from a reputational scandal intact. There’s no use looking for external counsel once the problem has arisen, though. Some forward thinking will result in the best value for money and an external team that’s prepared for your specific case and business needs. “During a crisis is the worst moment to search for external counsel that best fits your company,” notes Danilo Quiros, legal compliance officer at Cuestamoras Salud in Costa Rica. “It’s important to identify the best counsel for your company ahead of any crisis to establish a relationship with them.”  Gonzalez Beltran agrees: “Get some external assistance – there are people dedicated to crisis management and they will give an external perspective and guide the company through difficult times.”

Taking a thorough approach to crisis prevention and management allows a company to identify grey areas of the business, where any unaddressed issues can fester and become a fertile spot for reputational risk. It is the responsibility of legal to be the “go-to”, as Falck’s Ruiz says, for anyone at the company who feels there is any doubt or grey area with anything related to the company. “The legal department should be open to hear out and give the corresponding importance to any individual who brings  doubt to the team,” he says. All other teams should see the legal department as their business partner who safeguards the company against any wrongdoing. “We shouldn’t be seen as the prosecutor, because if people are afraid to bring their queries to the legal department due to fear of getting in trouble, many delicate issues can go by under the radar, which generates a contingency within itself,” Ruiz adds. Time is of the essence when a crisis ensues but doing things correctly will benefit the company in the long run. “As they say, ‘the medicine can be worse than the disease,’ and in today’s social media era, you are going to make matters worse unless you take into consideration the cause of the reputational damage and the technical solution to it,” adds Quiros.