Lawsuits Highlight Potential Board Risk

Corporate directors may need to re-evaluate their risk of being held personally responsible for the long-term negative effects of products on consumers and communities.

Recent lawsuits seeking damages related to harm victims suffered from products or actions companies took (or failed to take) may eventually seek to find directors responsible. This is a trend that is likely to continue. Examples of such lawsuits include:

• The Sackler family is facing litigation that could result in a $10 billion to $12 billion settlement and the company filing bankruptcy for its aggressive marketing and distribution of the drug OxyContin through Purdue Pharma and the role the drug played in the opioid epidemic that has caused more than 200,000 overdose deaths since 1996. Other companies that face similar lawsuits and billion-dollar judgments connected to the opioid epidemic are Johnson & Johnson and Teva Pharmaceuticals.

• The city of Baltimore is suing more than two dozen fossil fuel companies including Exxon, Shell and Marathon Oil over the negative effects of climate change on its citizens. The city is arguing that the companies knew the harmful effects of fossil fuels years ago and should have taken actions to mitigate the damage—instead, they did nothing, and now climate change is threatening the planet. The lawsuit seeks unspecified damages.

• Juul faces multiple class action lawsuits that seek to hold the company responsible for using illegal advertising and marketing techniques that target minors. The lawsuits also argue that the company’s products lead to nicotine addiction and death through the use of e-cigarettes and vaping products. At least 26 people have died and more than 1300 people have contracted vaping-related illnesses nationwide. The lawsuits seek damages for victims.

This current wave of lawsuits that seeks to hold companies legally responsible may at some point ask what role the board played in the harm that came to victims. The business judgment rule and directors and officers insurance provide board members some defense against liability when lawsuits are filed. However, the current environment that appears to encourage corporations to look out for all stakeholders means that directors may need to shift their thinking to be more critical of the potential long-term ramifications of their board’s business decisions. In general, these lawsuits claim that corporate decisions made for profit in the short-term ultimately produced long-term harm to consumers and communities. Being associated with such an outcome would be devastating to a director’s reputation and career.

Clearly, trying to anticipate future outcomes is difficult, but corporate directors may have to make it standard practice as part of the new normal that comes with the job. As these lawsuits gain more attention, they can cause reputational damage to the company, stock price declines and consumer concerns. Should these things happen, shareholders will no doubt look to hold directors responsible when it comes time to re-elect the board. To fend off lawsuits and protect the company from a wide range of risk, contemplating the long-term ramifications of business decisions must become a higher priority for directors. The future of the company may depend on it.