In a 2005 study of CEO employment contracts at U.S. corporations, only three out of 375 cited sexual harassment as grounds for termination.
“I haven't done a follow-up study,” says co-author and Vanderbilt University corporate law scholar Randall Thomas. But, in view of high-profile misconduct cases involving the likes of film producer Harvey Weinstein and CBS chief executive Leslie Moonves, “I am assuming that the number of CEO contracts that include sex harassment today as grounds for termination for cause has increased.”
“The definition of for-cause termination is very important when it comes to exit talks and severance, because it determines how a CEO is fired and under what circumstances, which can impact the stock price,” the Vanderbilt professor said in an interview during the Institutional Investor Educational Foundation's Global Activism Conference in November in New York.
It is a sign of the times that advance publicity of the event included a session titled “The Me-Too Movement: A Shareholder Perspective,” with Deborah Elman, a director of plaintiff advocacy firm Grant & Eisenhofer, as moderator.
As a result of closer scrutiny and accountability, “prominence of a CEO has become a risk where it used to be an asset,” said Grant & Eisenhofer managing director Jay Eisenhofer, who spoke on the panel covering shareholder and fiduciary duty in light of #MeToo. “The fact that these particular CEOs were so important to the success of the company, and the misconduct has gone on over multiple years, indicates there is a lack of oversight. It is a risk for the company's success to be so inextricably tied up with that one person.”
Brand Damage
The whistleblowing that was sparked by the Weinstein case in 2017 has brought reputational risk to the fore, with potentially severe financial consequences.
“These companies are taking a hit to their brand,” Eisenhofer said. “They've taken a hit to their image, and valuable employees are leaving. The lawsuits impact asset managers and investors because they suffer losses in the stocks of these companies.”
An example is Wynn Resorts, which suffered an 8% share-price decline in January 2018, according to Bloomberg, on allegations of sexual harassment by founder Steve Wynn.
“A lot of people, in particular women, who formerly attended conferences at places like Wynn Resorts have canceled and refused to patronize the hotel because of the behavioral issue having to do with the underlying '#MeToo' lawsuit,” said Grant & Eisenhofer director Elizabeth Graham.
Institutional-investor due diligence on executive behavior has quickly reached a point where “funds will look at who's in charge, the company's reputation, and whether there have been lawsuits or settlements, because they ultimately have to answer to their investors,” Graham said in an interview after the panel discussion.
ESG and Responsibility
At Dutch pension manager APG, both internal and external investment manager agreements include performance as well as environmental-social-governance (ESG) expectations.
“We are committed to a responsible investment policy, which means that we require our investments meet certain standards of responsible business conduct,” said Anna Pot, manager of responsible investments with APG Asset Management. “It is at the heart of our investments to look at not only cost, risk, the return, but also the ESG performance of our investments. Board diversity, for example, is among the topics of conversation that private equity managers and private equity teams have with a potential manager.”
Graham of Grant & Eisenhofer said more investment managers “are asking questions like, 'What is the code of conduct?' and 'What does your company do to prohibit these acts?'”
“Fund managers are looking harder at the companies that they are putting their clients' money into and what their portfolio is going to look like,” Graham continued. “If a company has a bad reputation, and they have been sued, it could very well have a financial impact on that company, because investors may start pulling out.” Reputational risk becomes paramount, regardless of the legal status or provability of claims.