In the News

Boards Beware: Culture Risk Is Intensifying


May 18, 2020

From a public company in Texas to a number of C-suites and boardrooms across the United States, business leaders grapple with the complexity of managing corporate culture. Everything from ensuring that employees feel comfortable reporting issues through company hotlines to updating policies around sexual harassment has come under the microscope in the wake of the MeToo movement.

But one of the most critical decisions for board members — and one with potential to bring significant criticism — is whether accused executives have to leave the company, and if so, on what terms, sources say.

In the case of an executive like a general counsel, one would expect an emergency board discussion about the implications of dismissing the executive with cause versus allowing a quieter exit with some money, says Suzanne Hopgood, a seasoned board director and the former CEO of Houlihan’s Restaurant Group and Furr’s Restaurant Group. Misconduct-related executive departures are “major” events, she says. Board members are suddenly launched into deliberating whether lawsuits may flow from either outcome and if the victim may wish to have the matter disappear, she says.

A board also must consider the signal that the ultimate decision sends throughout an organization, says Hopgood, who is now president and CEO at consulting company The Hopgood Group. It may be that the best decision is to get someone out quickly with a payout, but board members should know that such choices may not sync with employees’ expectations, she explains.

The law gives board members considerable latitude in carrying out their fiduciary duties, says Dorothy Lund, assistant professor of law at the University of Southern California Gould School of Law. And that fact extends to instances in which directors decide to have accused executives leave with severance.

. . .

Ousted executives do indeed initiate court battles with companies over a lack of severance. Following the 2018 termination of former Barnes & Noble CEO Demos Parneros for alleged violations of company policies, Parneros sued, claiming that B&N breached his employment contract in refusing to pay out his severance. Parneros has denied in court filings that he violated company policies. The resulting litigation has spurred numerous depositions that have exposed the way the company handled an accusation of sexual harassment against Parneros, which included an apology meeting between the accuser and the accused, as Agenda has reported.

Still, in Lund’s opinion, there are indicators of a shift in the risks associated with misconduct claims against executives. For one, litigation specific to such allegations has resulted in multimillion-dollar settlements, she points out.

Twenty-First Century Fox Inc. reached a $90 million settlement in 2017 to resolve shareholder claims that senior executives facilitated a culture of sexual harassment that board members did not take steps to address. A $41 million settlement was reached last year in a derivative suit associated with disputed allegations against former Wynn Resorts CEO Steve Wynn.

. . .

Moreover, Lund says considerations beyond just discretion under the law should factor into directors’ decisions about the departures of accused higher-ups. Board members ought to consider the implications of sending off an executive accused of misconduct with a high-dollar pay package, says Lund. Under the narrow assumption that board members prioritize shareholders above other stakeholders, there’s an argument to be made that allowing someone credibly accused of harassment to quietly walk away with a payout impacts employee productivity and — if the story comes out — the ability to hire talent, she notes.

But with the push to consider more than shareholders’ interests, there’s a sense that board members and other corporate fiduciaries need to think about their duties differently, Lund adds.

Julie Goldsmith Reiser, partner at Cohen Milstein, echoes the importance for board members grappling with these circumstances to think beyond their own shareholders when dealing with executives credibly accused of sexual misconduct. Directors don’t have a fiduciary duty to any other company’s employees or shareholders, if the executive were to land elsewhere, notes Reiser, a lead attorney in the derivative suit against Wynn Resorts insiders. But particularly as the intensity of the allegations increases, she says, there’s room for thought from directors about acting in “a more public way.”

“[W]hether it’s a hero’s farewell or [they] leave because they’re moving on, … who else are you putting at risk?” she asks.

Read Boards Beware: Culture Risk Is Intensifying.