Corporate America's hidden risks – major headaches threaten companies that ignore their 'moral liability'

NEW YORK (FORTUNE) — Most FORTUNE 500 companies employ brigades of lawyers to limit their legal liability. But how many worry about their “moral liability”? Probably not enough, if only because the lines are blurring between the two.
Moral liability is the idea that companies will pay a price if they fail to meet society’s expectation that they act ethically. Sometimes the price will be damage to a brand or reputation. Other times, the cost will be more concrete, in the form of lawsuits, damage awards or lost sales.
Either way, merely obeying today’s laws will not protect a company because the expectations of business are rising. Indeed, sticking to a compliance mindset is dangerous because firms that do so risk missing bigger threats beyond the world of laws and government.
This may sound abstract. It’s not. Ask executives at Nike (Charts) or Gap (Charts), companies that found themselves under assault, not because they broke laws, but because they tolerated substandard working conditions in overseas factories.
Or look at Yahoo! (Charts) and Microsoft (Charts), which came under attack for helping the Chinese government censor the Internet. Or Victoria’s Secret, the target of an activist campaign, because it printed its catalogs (about 390 million a year!) on paper from ancient forests.
These companies obeyed the law but suffered big headaches anyway.
Two recent studies put a spotlight on this issue. The McKinsey Quarterly published a survey called “When Social Issues Become Strategic” by Sheila Bonini, Lenny Mendonca and Jeremy Oppenheim that reported: “Issues such as privacy, obesity, offshoring and the safety of pharmaceutical products can alter an industry’s ground rules, and the financial and reputational impact of mishandling these issues can be huge.” You can read the McKinsey report on the firm’s Web site.
In an earlier study called “The Changing Landscape of Liability,” Geoff Lye and Francesca Muller of the British consultancy Sustainability write: “Companies are operating in a new and more challenging environment where risks of legal action against them are greater than ever. . . Even if companies avoid trial and prosecution in real courts, society could put companies on trial in the court of public opinion.” Their report is available at
More is at stake here than reputation. Moral liability often evolves into legal liability, sometimes quickly. “Laws are a lagging indicator,”says Lye. “We’re seeing very rapid shifts in society’s expectations of business.”
Here are some areas where business faces emerging moral liabilities:
Global labor standards: Most visitors to this Web site, as kids, never thought about how and where their T-shirts and sneakers were made. Now companies spend millions of dollars to monitor their supply chains.
The issue is moving into the courts: Last fall, a group called the International Labor Rights Fund sued Wal-Mart (Charts), on behalf of workers on four continents, employed by its suppliers. Wal-Mart says it is beefing up its inspection programs.
Human rights: Companies that do business in dictatorial regimes face negative press, boycotts and lawsuits. In Doe v. Unocal, plaintiffs charged that the California-based energy company Unocal was complicit in human rights abuses against Burmese villages while building a gas pipeline there in the 1990s; the company eventually settled, making a payment reported to be about $30 million. Other plaintiffs, using the Alien Tort Claims Act, which allows foreigners to bring suit in U.S. Court, have filed human rights claims against Chevron, Coca Cola, ExxonMobil, Texaco and Union Carbide, among others.
Climate change: Environmentalists want to hold companies accountable for spewing greenhouse cases into the air. While it will be difficult to attach legal liability to individual companies, the attorneys general of eight states and New York City last year sued major emitters of carbon dioxide, the primary pollutant that causes global warming.
The defendants include American Electric Power, Southern Company, the Tennessee Valley Authority, Xcel Energy and Cinergy. Even if the suit fails, it’s a warning to the companies to clean up their act.
Philip Rudolph, vice president and general counsel of a consulting firm called the Ethical Leadership Group, says such lawsuits cannot be dismissed as nuisances. “The bounds of liability are beginning to stretch in ways that traditional lawyering does not address,” says Rudolph, who has represented brand-name companies in the apparel, footwear, jewelry and food industries.
“You can have companies being sued by their own customers over the lawful use of a legal product,” he notes, such as the obesity lawsuits brought against McDonald’s, albeit without success.
(To read more about the initiatives some companies are taking to tackle global warming read my colleague Adam Lashinsky’s column.)
Here’s the good news – all these social issues present opportunities as well as threats. Timberland tells customers that its shoes and boots are made in factories where workers’ rights are protected. The same goes, now, for Nike and Gap. Toyota (Charts) sells lots of hybrid cars, mostly because of rising oil prices but also because of the concerns over climate change. General Electric’s “ecomagination” initiative aims to profit by selling products that save energy and reduce emissions.
That’s the best way for business to avoid “moral liability” – become part of the solution instead of part of the problem.

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