Narrative Contradictions: An Emerging Corporate Governance Risk

Publicly traded companies generate voluminous amounts of information in public statements required by law. Meanwhile, regulators, investors, and stakeholders scrutinize this information for more than just accuracy. As a result, corporations are now discovering that the coherence of their public statements matters, too, for the sake of risk management.

We’re not talking about traditional cases of fraud or misrepresentation here. In fact, companies are finding public statements that are individually accurate can still trigger regulatory enforcement actions, investor backlash, and reputational crises. The problem is narrative contradictions – statements that are factually defensible in isolation yet collectively irreconcilable – and regulators and markets alike are treating them as failures of corporate governance.

Several recent high-profile cases illustrate how narrative contradictions can have tangible legal and financial consequences. For example, in 2019 and 2020, the beverage company Keurig Dr Pepper stated in its annual reports that it had “conducted extensive testing with municipal recycling facilities to validate” that the pods known as K-Cups used in its coffee machines were recyclable. The company neglected to mention, however, that two of the largest recycling service providers in the United States had previously notified Keurig that they put the kibosh on taking K-Cups at their recycling facilities. In 2022, Keurig Dr Pepper reached a $1.5 million settlement for its case of selective disclosure.

The most dramatic example of incongruence in a corporation’s public statements comes from the aviation industry and safety concerns around Boeing’s 737 MAX airplanes. The company’s assurances as to the safety of its planes conflicted sharply with damning internal communications and engineering warnings about their  design. Boeing was ultimately tagged with regulatory penalties, criminal charges, and more than $20 billion in losses. The company reached a $200 million settlement with the SEC in 2022 over charges it misled investors, while its former CEO, Dennis A. Muilenburg, paid $1 million to settle charges stemming from the same inconsistencies.

More recently, the SEC took action against pharmaceutical developer FibroGen and its former chief medical officer, Dr. Kin-Hung Peony Yu, alleging the company and Yu misled investors about the safety of one of its drug candidates. Notably, the SEC took issue with a dramatic shift in how the company characterized the results of a cardiovascular safety analysis of the drug in 2021. The correction precipitated a drop of more than 40% in the price of FibroGen stock.

Even companies that promote ethical principles sometimes find themselves challenged by disconnected narratives. Anthropic, an artificial intelligence company created by former OpenAI employees, promotes responsible development of AI. However, the company’s mission isn’t preventing it from lobbying against California’s AI safety bill. Despite dire warnings from Anthropic’s CEO that dangerous AI could emerge by 2025, the company, according to Senate testimony, opposes enforcement mechanisms until “after a catastrophe has occurred.”

Industry observers note market pressures create incentives that make narrative consistency difficult even for well-intentioned organizations. Moreover, it appears many of the issuers’ problems with narrative contradictions stem more from organizational structure than outright deception. Sometimes new corporate priorities arise, creating temporal contradictions with unreconciled legacy commitments. And functional contradictions emerge when different departments within the same company craft separate narratives for distinct stakeholder groups. That’s how Canadian energy companies Cenovus and Enbridge got hit with a greenwashing complaint: Their European marketing materials promised pursuit of carbon neutrality, while their U.S. regulatory filings revealed they were engaging in fossil fuel expansion.

Regulators are addressing the growing risks from narrative contradictions in a variety of ways. New disclosure regimes such as the SEC’s climate rules and the EU’s Corporate Sustainability Reporting Directive are emerging, explicitly requiring consistency among disclosures. Increasingly, enforcement actions are predicated on contradictions, rather than inaccuracy. The SEC is even giving corporate executives skin in the game to promote accountability, as the Boeing and FibroGen cases suggest.

As for the companies themselves, we can identify measurable financial implications in how they manage the narratives they promote. Research indicates that companies with robust narrative consistency mechanisms command valuation premiums of 8-12% and enjoy lower costs of capital. Yet, it appears as though the governance gap in the corporate world remains significant. A recent PwC survey found that only 32% of executives believe their boards have the right expertise for today’s challenges.

Companies are beginning to develop infrastructure intended to rectify their narrative problems: contradiction registers to log inconsistencies, distributed committee oversight, AI-enabled detection tools, and cultures where employees can surface contradictions without retaliation. Such tools are arguably coming late in the game, though. In an environment in which the difference between what organizations say and what they do has never been more apparent, narrative contradictions need board-level attention and systematic controls.