This Risk Could Cost You Big Bucks

Big business's bad behavior has very real costs. Executives who shun good corporate governance often invite disasters that prove expensive both in hard currency and shareholder value. Whether they're guilty in fact, or simply look guilty in the eyes of the public, companies that stray from responsible behavior increasingly face real financial pain in the courtroom.

Guilty, guilty, guilty
As Bloomberg recently reported, more juries are now calling for ever-more-expensive verdicts for companies convicted of providing defective profits. High-profile lawsuits against companies such as Toyota (NYSE: TM  ) and fitness-equipment maker Cybex International (Nasdaq: CYBI  ) , as well as general popular disdain related to the BP oil spill, may have increased the public's suspicion of big companies, and sharpened their desire to throw the book at corporate malefactors.

Just ask Altria (NYSE: MO  ) and other tobacco makers how painful "defective products" cases can be. Altria says there are currently 9,000 smoker health cases in Florida courts alone. The worse companies behave, and the more attention their misdeeds gain, the more likely juries are to extract whopping judgments from companies whose products have a perceived or proven link to illness, injury, or death. Our still-hurting economy, and the wildly unpopular bailouts awarded to many of the companies largely responsible for its pain, may also explain some portion of juries' increasing ire.

According to Bloomberg, the largest five product-liability verdicts in 2010 added up to $1.1 billion, up from $620 million in 2009 and $408 million in 2008. No major changes in laws explained 2010's 77% surge; Bloomberg quoted litigation expert Victor E. Schwartz, who called this outcome "more atmospheric than legal."

The social consciousness solution
Companies that want to avoid looking like the bad guys should stick to the straight and narrow in the first place. Fortunately, many companies have begun to realize the importance of truly responsible behavior in rebuilding their public images. In addition to larger liability verdicts from juries, 2010 also marked a surge in discussion about corporate social responsibility.

Plenty of corporations have long understood that good works and a good reputation are vital in a marketplace that's run short of trust. Whole Foods Market's (Nasdaq: WFMI  ) John Mackey has stumped for conscious capitalism over the years, arguing that for all the innovations and opportunities it creates, capitalism has built up a brand problem. Companies like Whole Foods and Chipotle (NYSE: CMG  ) , with its "Food with Integrity" mission, try to fight that bad branding by building more positive, socially conscious behavior into their corporate DNA. When companies behave well, consumers feel better about purchasing their products.

Nice companies finish ... first?
To better defend your investments against the possibility of massive legal losses and public backlash, identify companies that stalwartly do the right thing, create high-quality products, and try to make positive changes in the world. Nice guys don't always finish last in the courtroom, or the court of public opinion. The safest investments lie in companies whose managers know that doing the right thing is the true path to sustainable growth and long-term profits. Now more than ever, that's the path of least resistance -- and least risk.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Whole Foods Market is a Motley Fool Stock Advisor pick. Chipotle Mexican Grill is a Motley Fool Hidden Gems recommendation and a Motley Fool Rule Breakers selection. The Fool owns shares of Altria Group and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 19, 2011, at 3:31 PM, cattywampus wrote:

    Great perspective on the big picture and long term thinking that has been sorely lacking lately.

  • Report this Comment On January 19, 2011, at 8:32 PM, stan8331 wrote:

    That's a great point - as societal attitudes toward corporate behavior evolve and mature, things that can be gotten away with right now may be looked upon much more unfavorably in the future. Owning highly profitable companies that go beyond the norm in terms of corporate responsibility and governance is a way to significantly mitigate that risk.

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