The #MeToo movement has led to an explosion of sexual harassment revelations in recent months. Allegations of sexual misconduct in the workplace have rocked the political arena, as well as the entertainment, news, retail, and technology sectors.
Strikingly, many allegations have involved individuals at the highest levels of their organizations and companies are facing increasing public pressure to respond swiftly. Failing to take appropriate action can affect the bottom line—potentially resulting in litigation, as well as damage to reputation, morale, productivity and the strategic direction and prospects of a company.
Directors owe personal duties to diligently oversee management and to act in the best interests of the company. In the wake of #MeToo, investors are looking to hold boards accountable for lost share value caused by failures to address workplace harassment. In November 2017, the Delaware Court of Chancery approved a US$90 million settlement in an investor lawsuit against Rupert Murdoch and other key directors at 21st Century Fox for lost share value allegedly caused by the directors’ failure to address longstanding issues of sexual misconduct involving the company’s CEO and other senior individuals.
Executives and corporate boards can and should play an active role in ensuring conditions which could give rise to sexual harassment are eliminated and that processes are in place to respond quickly if a situation does arise. Being prepared and proactive is key. Here are our suggestions to reduce your organization’s risk.
- Set the tone from the top. Company culture starts at the top. Corporate leaders should be personally committed and incentivized to promote and create a respectful and inclusive workplace that does not tolerate harassment and discrimination. In today’s climate, corporate leaders need to inform themselves about what the company’s culture is like “on the ground.” Boards must be prepared to take swift action if there are signs that management is failing to address issues, whether isolated or systemic. Consider tying executive compensation to metrics that promote inclusion and a harassment-free workplace. Ensure that violations of the company’s harassment and discrimination policy constitute “for cause” termination.
- Have robust whistleblower, harassment and discrimination policies. Ensure everyone is aware of the policies. The harassment and discrimination policy should be explicit as to what conduct is inappropriate and won’t be tolerated. The policies should be easily available to employees, and reviewed and updated annually. All employees should know how to make a complaint under the policies, and to whom.
- Ensure complaints are actually being addressed. To have teeth, a company’s harassment and discrimination policy must be enforced. Complaints need to be taken seriously and addressed promptly. Directors may be liable for failing to identify systemic enforcement issues, or failing to address known ones. Ask management hard questions if a trend appears. Consider retaining an independent consultant to audit the company’s records and history of complaints to identify any issues.
- Train employees and managers regularly. Training should be meaningful and robust. Anyone with responsibility for conducting investigations under the policy should receive directed training.
- Ensure procedures and resources are in place to handle complaints. In Ontario, the Occupational Health and Safety Act mandates investigations into allegations of workplace harassment and imposes certain procedural requirements, such as notifying both parties of the results of an investigation. Ensure that appropriate resources and personnel are in place to handle complaints. Consider using a third-party complaint management service. Consider the circumstances under which the company will conduct an internal investigation and when it would be appropriate to retain an external investigator. Among other things, retaining an external investigator to conduct the investigation can help assuage concerns about the independence and integrity of an investigation.
- Have a crisis management plan in place. Allegations of sexual harassment can develop quickly. Boards should be satisfied they are prepared to handle these issues when they arise. The board should have a plan in place to quickly deal with allegations of misconduct aimed at senior leaders and the possibility of taking action to remove them. The plan should be flexible, rather than prescriptive. At a minimum, it should address: (i) the formation and composition of a special committee of the board to allow for quick decision making; (ii) which members of management would also need to be on the crisis team and what roles they would play (consider: legal, compliance, HR, IT, PR); (iii) what should be done to investigate/evaluate the situation and who will do what (consider procedures set out in existing policies, including whistleblower or workplace harassment policies); (iv) the outside advisors which the board may need to involve (legal, PR, forensic accountants); (v) who will be responsible for day-to-day management responsibilities during an investigation; and (vi) governance and public disclosure requirements, including the communications plan to stakeholders, whether directly, or through mainstream or social media.
- Apply appropriate diligence to acquisition targets and strategic partners. A company’s reputation can be irreparably damaged when it combines or partners with an organization that does not share its values. When looking at material acquisition opportunities or other strategic partnerships, ensure you apply diligence to the culture by seeking out information regarding the counterparty’s policies, governance practices, history of complaints and, where possible, conducting interviews with senior and mid-level management.
Securities Law Considerations
Companies that are publicly listed on a Canadian securities exchange are required to provide timely disclosure of “material” information that could “reasonably be expected” to affect the value of their securities. Similar obligations exist for companies listed on foreign securities exchanges. Canadian public companies also have ongoing obligations under Canadian securities laws to make immediate disclosure of any material changes and periodically report material facts in their continuous disclosure filings.
Boards need to monitor sexual harassment investigations and consider whether disclosure is required under securities law or stock exchange rules.
Boards need to monitor sexual harassment investigations and consider whether disclosure is required under securities law or stock exchange rules. If an executive is central to the brand of a company, or has been identified in public disclosure documents as key to the company’s success, public allegations could negatively impact the company’s share value. Failure to make appropriate and timely disclosure may result in civil and regulatory liability for both the company and directors personally.
Foreign law makers and regulators have started to show interest in workplace sexual misconduct. In the United States, amendments have been proposed to the Securities Exchange Act of 1934 which would require public companies to report on settlements related to sexual abuse, harassment, and discrimination. At the same time, U.S. federal prosecutors are currently investigating a major news outlet for breach of securities rules for allegedly disguising a settlement payment in a sexual harassment claim as “salary and compensation,” arguable to avoid disclosing the existence of harassment allegations and settlement. In the United Kingdom, the Financial Conduct Authority decided to publicly censure a former bank executive over allegations of workplace misconduct. The Authority has also reportedly commissioned a 350-page report on workplace misconduct at a prominent U.K. bank.
We expect Canadian securities regulators may begin to focus on these issues as well. It is therefore critical that boards be ready to respond in the event of an allegation of sexual misconduct.