Category Archives: Risk Management

Soda Giants Pop the Top on Better-For-You Business

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Soda Industry Healthy Choices

This week, Pepsi unveiled a new offering: Pepsi True, a mid-calorie, lower-sugar soda that uses a mixture of sugar and stevia, a plant-based sweetener. By offsetting some of the sugar with stevia, the company has reduced the sugar content by 30% and the calories by 40%. Each 7.5 oz. can—a smaller serving than the traditional 12 oz.—contains 60 calories and will be priced on par with regular Pepsi. Available on Amazon.com later this month, the reduced-calorie soda joins the market with Coca-Cola Life, which also mixes sugar and stevia to lower the calories and sugar content while moving away from both high fructose corn syrup and artificial sweeteners. Coke rolled out their lower calorie drink in international markets last year, before launching in the U.S. at the end of August.

The new options are not the only changes consumers will see bubbling up at vending machines. Soda industry giants Coca-Colo Co., PepsiCo Inc., and Dr. Pepper Snapple Group Inc. have all signed onto a voluntary agreement to cut beverage calories in the American diet by 20% by 2025 by promoting bottled water, low-calorie drinks, and smaller portions. The measure was bartered by the American Beverage Association and the Alliance for a Healthier Generation, a children’s health group founded by the American Heart Association and the Clinton Foundation. The companies agreed to market and distribute drinks in a way that steers consumers to smaller portions and zero- or low-calorie drinks, the Wall Street Journal reported. Further, they have committed to provide calorie counts on more than 3 million vending machines, self-serve fountains, and retail coolers. In a statement, former President Bill Clinton heralded the commitment as a possible “critical step in our ongoing fight against obesity.”

The companies made a similar pact to stop selling soda in U.S. schools, which helped curb calories consumed from beverages at schools by 90% between 2004 and 2010, according to the American Journal of Public Health. Americans consume about 20 teaspoons of sugar a day—twice the amount considered healthy—and the government estimates that about a third of that sugar comes from soda, energy drinks, and sports drinks.

Falling Soda SalesMuch like CVS Caremark’s move to ban cigarette sales in stores, Big Soda has a lot to gain by helping customers make healthier choices. While the move may pose some implicit acknowledgement of the soda industry’s role in the American obesity epidemic, it also serves a role in boosting the bottom line. A public commitment to healthier options is a major reputation boost for an industry under attack from nutritionists, government initiatives, and scientists examining the impact of ingredients in both regular and diet offerings.

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And amidst that momentum, there is a perfect opportunity to introduce more offerings for customers to purchase, which could not come at a better time. Big Soda’s business has not only gone flat, it’s been evaporating away for about 10 years. In fact, according to Beverage Digest, the decline in volume more than doubled last year to a 3% drop across the industry as consumers grow increasingly concerned about the health effects of sugary drinks.

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Further, the trade publication reported that retail sales dropped 1% to $76.3 billion—the first monetary drop in at least 15 years, meaning companies were unable to offset volume declines by raising prices.

The losses are not limited to sugary sodas, however. Diet sodas, which make up a third of soda sales in the U.

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S., have fallen in sales three years in a row. They no longer present a safeguard against attacks—and cutbacks—on full-calorie beverages. Clearly, consumers want other options, and research about the potential perils of both sugar and artificial sweeteners has customers uncertain, and increasingly unwilling to purchase.

Reputational Risk in Their Own Words

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Many risk managers are struggling to get their arms around reputation risk. One challenge is that risk, a threat to valued asset or desired outcome, is hard to discuss in modern terms without statistics. Statistics, on the other hand, can be mind-numbing.

First, the accountancies. Eisner & Amper reports that reputation risk has been the number one board concern for each of the past four years. Deloitte concurs on the ranking but emphasizes the strategic nature of reputation risk. E&Y finds reputation risk in international tax matters; PwC finds reputation risk in bribery, corruption and money laundering. Oliver Wyman, a human resource and strategy consultancy, reports that reputation risk is a rising C-suite imperative ranking fourth this year (and third among risk professionals). Reputation risk was fourth in Aon’s 2013 survey. Willis shared data showing that 95% of major companies experienced at least one major reputation event in the past 20 years.

Ace in 2013 reported that 81% of companies told the insurer that reputation was their most important asset. Allianz’s 2014 global survey ranked the risk sixth of the top 10. Rounding out the professions, the 2014 study written by the Economist Intelligence Unit and published by the law firm, Clifford Chance, reported that 74% of U.K. board members see reputation damage as the most worrying consequence of an incident or scandal, ranking it as more serious than the potential direct financial costs, loss of business contracts and even impact on share price.

Anecdotes provide context that can personalize statistics. They can help transform a cerebral conversation about reputation risk to an action plan for managing enterprise reputation risk, protecting long-term enterprise value, and protecting the personal reputations of a company’s leadership.

This week’s anecdotes are exemplary. Goldman Sachs issued a company-wide directive banning its investment bankers from trading individual stocks for their own accounts. The Financial Times reported that “…Goldman told employees it was stopping bankers buying and shorting individual stocks and bonds to ‘help mitigate potential conflicts between firm personnel and clients . . . while helping the firm better manage reputational risk.’”

Across the pond after settling with U.S. and U.K. regulators, Lloyd’s Banking Group dismissed eight employees and clawed back bonuses for the rigging of the London interbank offered rate and related benchmarks. “Significant reputational damage and financial cost to the group are fully and fairly reflected in the options considered in relation to other staff bonus payments,” is how Chairman Norman Blackwell explained the personnel actions, according to Bloomberg.

The Daily Mail finds worrisome the loss of market share from 30.2% to 28.8% for Tesco, which currently reports annual sales of £65 billion ($105 billion). But given that the losses may have been intentionally contrived by senior management is mind boggling. “Most disturbingly of all is the reputational damage, which could linger for years.”

In contrast, Nishit Madlani, an analyst at S&P, is finding encouraging signs at General Motors. “The company’s performance over recent months has shown that recalls haven’t impacted sales. Reputational damage did not transpire, for the most part,” Bloomberg reported.

The statistics affirm reputation is top of mind. To make reputation risk actionable for a risk manager means understanding from the anecdotes that it is a going-forward risk affecting all stakeholder behaviors. Reputation damage will impact sales, credit ratings, regulatory scrutiny and executive compensation. Managing risk to reputation requires an enterprise-level strategic solution that, were it to think about it, senior management would demand today.

How Not to Settle a Class Action

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Settling a workplace class action is far more complicated than resolving other types of litigation. Yet, the fundamental building blocks of settling a case—an offer, acceptance of precise terms, and substantiation of the agreement—are equally as important in resolving a simple as well as a complex piece of litigation.

On Sept. 23, Judge Amy St. Eve of the U.S. District Court for the Northern District of Illinois in Craftwood Lumber Co. v. Interline Brands, Inc., drove home this point. The court held that, despite creating a “term sheet” outlining certain terms of a purported class action settlement, the parties had not reached an enforceable settlement.

This ruling illustrates that although parties may be bound to a class settlement prior to the creation of the final agreement, which is what occurred in the Tenth Circuit decision of Miller v. Basic Research, LLC, covered here, that in order to be bound, the parties must have at least reached an agreement to the materials terms of the contract and exhibit the intent to be bound.

Although it is not an employment-related case, Judge St. Eve’s ruling in Craftwood Lumber ought to be required reading for any employer entering into settlement negotiations relative to a class action.

Background

Plaintiff, Craftwood Lumber, brought a putative class action alleging that the defendant, Interline Brands, Inc., violated the Telephone Consumer Protective Act of 1999, by sending at least 1,500 advertisements in at least 735,000 facsimile transmissions, some of which were received by the plaintiff. The parties attempted to settle the case through mediation. At the end of the one-day session, the parties and counsel hastily signed a one-page document titled “Term Sheet.”

In the following weeks the parties unsuccessfully attempted to negotiate a written settlement agreement. The defendant brought a motion to enforce the settlement, and in support, it provided the court with a copy of the Term Sheet, arguing that the parties had entered into a settlement agreement. The plaintiff’s counsel objected, asserting that there was no agreement and that it was a violation of the confidentiality agreement to produce the Term Sheet to the Court.

The Court’s Opinion

Judge St. Eve held that the Term Sheet failed to include several terms that were material to the class action settlement. The most significant omission was the amount per claim—what the defendant would pay any class member for each fax recipient or each fax transmission. Additionally, the Term Sheet lacked any release terms and settlement class definition. The court reasoned that the provisions upon which the defendant was basing its assertion that an agreement had been reached were insufficient to reasonably imply the missing terms. Judge St. Eve determined that she was unwilling to select those terms from the wide range of potential possibilities. Ultimately, the court held that in addition to lacking materials terms, it was unclear whether the parties intended to be bound by the Term Sheet. On this basis, the court held that the parties did not enter in to an enforceable settlement agreement.

Implications for Employers

This ruling illustrates what can go awry in terms of documenting an enforceable class action settlement. In order to secure an enforceable settlement agreement, the parties must reach an agreement on the material terms and evidence an intent to be bound. Normally, this situation is not a problem, given that the parties normally will strive to achieve these ends in the settlement agreement. This translates into investing significant time and effort to craft a precise Term Sheet; covering all of the key terms of the settlement (such as the class definition, the class pay-out distribution formula, and myriad other bells and whistles that make up a Rule 23 class-wide settlement); and not leaving the settlement/mediation session unless and until all of these issues are covered and both parties express their intent to be bound. Simple, but critical.

This column previously appeared on the Seyfarth Shaw website.

Dealing with Reputation Risk

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reputation risk and social media

Properly assessing risk is critical to any business. Successful businesspeople understand that every decision they make must be weighed against the potential risk to the company. This risk assessment must not be limited solely to situations directly related to the business itself, however.

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They must also consider reputation risk, or the risk events will have a negative impact on one’s personal reputation and, by extension, the business.

Whether fair or not, the decisions made in someone’s personal life can have a substantial impact on the company they are connected to. This risk extends beyond just the owner or executives of a company; employees caught doing unscrupulous things can cause a public relations nightmare for the business, ultimately resulting in massive losses for the company itself.

Assessing Reputation Risk

Unlike business transactions, where there are countless models and historical examples of the likely risk and reward of most given situations, reputation risk is far harder to quantify and prepare for. It is nearly impossible to predict, for example, whether or not an executive will get belligerently intoxicated and assault a police officer. The executive can bring unwelcome attention to the company, which in turn can cause investors, advertisers, and partners to shy away in the short or even long-term.

Exacerbated in the Social Media Generation

Social media platforms such as Facebook and Twitter have dramatically intensified reputation risks. In the past, it was possible for a relatively minor incident to be swept under the rug or forgotten relatively quickly. If not, chances were good that a story would stay relatively local, perhaps reported in an area newspaper once or twice before fading from memory.

Today, however, even a single story in a local newspaper (or, worse, an online blog) can be shared and re-shared thousands of times in a matter of hours.

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“Viral” stories can spread across an industry and the country within only a day or two. By the same token, an ill-advised Facebook or Twitter post on a controversial topic can be shared just as quickly.

Mitigating the Danger

Unfortunately, there is only so much one can do when trying to guard against reputational risk problems. It is impossible to control every human being’s actions, and even harder to control them every second of every day. The only viable solution is offering guidelines to employees and executives to try and minimize the problem as much as possible. It is also worth calculating risk factors among employees. For example, an employee with a history of public intoxication or domestic abuse issues may not be someone you want representing your company.

At the end of the day, there is only so much one can do to reduce reputation risk. It is important, however, to have a public relations strategy on hand for if and when a troublesome situation arises—and it almost certainly will at some point.

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