Reputational Regulation

Abstract

When organizations act in ways that offend the public interest, parties seeking to change that behavior traditionally turned to litigation to force these organizations to reform, whether by command or consent. For example, following Brown v. Board of Education, "structural reform litigation" forced large-scale organizations, from school boards to prisons, to change their practices. Similarly, federal prosecutors have used agreements with large corporations to introduce significant structural reforms. This Article identifies an alternative strategy for organizational change that relies on the indirect reputational effects of litigation. Under this approach, organizational change does not result from court order or parties' settlement but from the informational effects of litigation: litigation transmits information about an organization into the public space; this information has reputational consequences for the affectedCopyright REV. 805, 848-60 (1990).5. Stephen Rushin, Structural Reform Litigation in American Police Departments, 99 MINN. L. REV. 1343REV. , 1378REV. -96 (2015.6. Adam Chandler, Walmart, Whole Foods, ATLANTIC (Dec. 16, 910DUKE LAW JOURNAL [Vol. 67:907 users' data; 7 the National Football League (NFL) hides the effects of head trauma; 8 Wells Fargo creates "fake accounts." 9 While "structural reform prosecution" has been used to change private organizations, this Article identifies an alternative strategy that relies on the informational effects of litigation. As this Article explains, litigation releases information about organizational conduct into the public domain. This information has reputational consequences for the affected organizations. Organizational change is a response to that reputational shaming. 10Under this approach, organizational change does not result from a court order or parties' settlement. The engine for change is reputation, and the fuel for that engine is information. Over the past few years, for example, the NFL has faced a series of lawsuits from injured players who claimed that the NFL knew about the dangers of head injuries but hid those risks and failed to mitigate those risks.11 As attention to head injuries from the media, athletes, and fans grew, the NFL introduced a series of new protocols to prevent and better understand head injuries, culminating in 2016's $100 million initiative "Play Smart, Play Safe. 14 Reputational effects are not unique to litigation, but also apply to other adjudicative processes, such as agency proceedings; organizational change can follow from the reputational effects of all these adjudicative processes. 15 For example, Wells Fargo angered many of its banking customers when it was revealed in September 2016 that Wells Fargo's employees had "secretly created millions of unauthorized bank and credit card accounts-without their customers knowing it-since 2011." 16 The Consumer Financial Protection Board (CFPB) fined Wells Fargo $100 million plus penalties for its sales practices, but that figure is only a fraction of t...

Outsourcing the enforcement of modern slavery: Overcoming the limitations of a market-based disclosure model

“…6 However, there is an extensive list of reasons why such a hypothesis is practically limited and theoretically flawed. Some noteworthy limitations include the failure to address information asymmetry amongst participants, (Parella, 2018) the existence of non-market constraints on consumer behaviour, (Bray et al, 2011) and the role of corporations within the market in shaping and distorting the rules of the game. (Scherer and Palazzo, 2011;Abbott et al, 2017) As Martin Wolf (2020) notes, 'corporations are not rule-takers but rather rule makers.…”

Shaming the Untrustworthy and Paths to Relief in China’s Social Credit System

“…In Nathan Cortez's (2011Cortez's ( : 1371 words, "agencies cannot unring the bell." Excessive harm, collateral consequences, and the risk of abuse are major problems in reputational regulation (Parella, 2018). Although it has become a conventional technique for administrative agencies, shaming often lacks any means to redress mistakes or abuses (Gellhorn, 1973;Cortez, 2011;Men, 2019).…”

“…Regulators disclose, or mandate organizations to disclose themselves, information that indicates how well they comply with laws and regulations, for instance, the amounts of dangerous fats in food products or pollutants emitted (Fung, Graham, and Weil, 2007: 15). Such regulatory disclosure is based on the idea that “the engine for change is reputation, and the fuel for that engine is information” (Parella, 2018: 910). It has also faced fierce criticism for overloading the audience with barely digestible information rather than giving advice (Ben-Shahar and Schneider, 2014).…”

“…Even if a target subject successfully objects to the publication of adverse information and the regulator takes it down, the reputational damage can hardly be undone. In Nathan Cortez’s (2011: 1371) words, “agencies cannot unring the bell.” Excessive harm, collateral consequences, and the risk of abuse are major problems in reputational regulation (Parella, 2018). Although it has become a conventional technique for administrative agencies, shaming often lacks any means to redress mistakes or abuses (Gellhorn, 1973; Cortez, 2011; Men, 2019).…”

“…Against this background, the post-event remedial mechanism of litigation does little to alleviate the damages ensuing from undue shaming for trust-breakers. The clumsiness of shaming measures (Parella, 2018: 930), their irreversibility, in addition to the difficulties and lack of the legislative intent to weave them into the administrative procedure framework, subjecting them to respective restraints, indicate that such measures are hardly controllable through the judiciary. Internal control mechanisms within the information handling agency may prevent undue damages.…”