Risking Reputation Rarely Rewarded: Lessons From The Lending Club

The recent news about Lending Club is a prime example of the reputational value of business ethics.  Last week, The Wall Street Journal reported the company’s twisted fate – it went from receiving a Tribeca “Disruptive Innovation Award” in April (given to then-CEO Renaud LaPlanche) to suffering tumbling stock prices in May, plummeting from approximately $8 on April 1, to a low of $3.94 on the day (May 16th) the WSJ report came out. 

The cause of the disruption- and subsequent cascading value- was the Board’s belief that Mr. LaPlanche was unethical in managing the company.  In particular, LaPlanche was criticized for selling loans in a securitization transaction with Jeffries & Co. that he knew contained falsified documents, and other discrepancies that didn’t meet the terms of the deal originally agreed to with the buyer. 

Further, a third party review of transaction documents conducted at the request of the Board showed that there was an undisclosed conflict of interest in a $10M investment in a company in which Mr. LaPlanche was 2% owner.  He had not disclosed his ownership interest to the Board when the transaction was approved.  The company has also received a grand jury subpoena from the Justice Department.

As Ethical Systems Collaborator Linda Treviño notes in Managing Business Ethics, a seminal textbook co-authored with Katherine Nelson, a good reputation is one of the key pathways that ethics pays for organizations.  In particular, a more favorable corporate reputation “may enable firms to charge premium prices, attract better applicants, enhance their access to capital markets, and attract investors.” Warren Buffet is also fond of emphasizing the need to guard against knocks to reputation as, in his view, it takes 20 years to build and only 2 minutes to destroy.

The market reaction to Lending Club supports this notion – the hit to their reputation has severely damaged the company’s market valuation in the hot online lending market. The Journal’s report also raises the possibility of contagion to other start-ups, as “investors and analysts say they have grown more cautious about the entire online-lending sector…”

What we witness here is an individual and company implosion at the expense of financial value. When missteps occur, it is not just the perpetrator who can experience adverse reactions; the company may also be damaged- deservedly or otherwise. Whether Mr. LaPlanche was motivated by a short-term, shareholder focus or if the company suffered from insufficient internal controls is no longer the top story. It will be to see if Lending Club can transcend the reputational fallout after detonating its previously ethical business practices in the eyes of consumers and investors.