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E-MailAmy Bowerman Freed is partner and J. Nicholas Hoover is a senior associate at Hogan Lovells. This post is based on their report, previously published in C-Suite.
The visibility of sexual harassment complaints against executive officers has increased over the last 18 months as a result of the #MeToo movement. In the wake of the growing focus on executive misconduct, companies should proactively assess their workplace practices. Below are 10 steps that companies should consider to avoid an embarrassing and damaging #MeToo situation.
- Invest in a healthy workplace. Companies should continue to make significant investments in creating a healthy, inclusive and respectful workplace. Hiring and promoting diverse employees will help create a strong C-suite. Diversity in the workforce enables companies to organically identify deficiencies in their existing prevention programs. Holding annual trainings on corporate policies sets the right tone, especially if members of the C-suite and department heads attend and lead these sessions. Companies should also invest in procedures to ensure that complaints against executives are treated appropriately and are reported internally to the proper supervisors. These measures include establishing hotlines with appropriate considerations and safeguards to ensure that complaints are elevated quickly to the right people within the company. For executive officers, complaints should be brought to the attention of the audit committee of the board. Employing third parties to operate the hotline helps ensure that employees feel comfortable raising issues involving misconduct.
- Conduct robust due diligence on prospective hires. Some companies are finding that a new hire’s prior misconduct is not disclosed until it’s too late—after the new hire has joined the company. Unless an applicant has a criminal record, a standard background check is unlikely to identify domestic violence, assault or other similar misconduct. Companies should consider hiring an investigator to conduct personal interviews of prior associates concerning the prospective executive. Doing so may uncover problematic behavior and avoid a potentially costly hire.
- Require prospective executives to make representations and warranties about prior conduct. Some companies are affirmatively asking of prospective executives whether or not they have ever engaged in sexual harassment or misconduct or been the subject of any prior sexual harassment claims. Some companies are going beyond mere inquiries and are requesting that prospective executives represent in their employment agreement that they have not engaged in prior misconduct and have not been the subject of allegations of misconduct. Tying breaches of these representations to compensation clawbacks adds teeth to the vetting process for a potential new hire. Companies may wish to consider updating these representations with annual certifications regarding compliance with corporate policies, the breach of which could serve as the basis for termination for cause.
- Eliminate pre-arbitration clauses in employment agreements. Pre-arbitration clauses in employment agreements often hinder prompt reaction to allegations of sexual misconduct. These provisions should be eliminated altogether or a carve-out should be built in for claims of sexual harassment or misconduct so that arbitration does not delay terminations.
- Boost corporate clawback policies. The clawback provisions of Sarbanes-Oxley require the forfeiture by the CEO, CFO and other financial executives of incentive compensation in the event of a restatement as a result of misconduct. Because most sexual harassment cases do not involve restatements, the baseline clawback provisions of Sarbanes-Oxley have limited utility in addressing allegations of sexual misconduct. Companies should consider broadening the scope of their clawback policies in the wake of #MeToo by adding provisions triggering clawbacks in the event of sexual harassment or misconduct. Companies should also consider expanding the application of the clawback provisions to all C-Suite executives.
- Expand the definition of cause in employment agreements. Companies should review the definitions for “cause” in their form employment and equity and incentive compensation agreements and consider expanding actions that constitute cause for termination to include sexual harassment and/or misconduct. At a minimum, companies should ensure that there are clear grounds to terminate an executive for cause should they violate sexual harassment policies.
- Add teeth to corporate policies. Companies should ensure that corporate policies against sexual harassment and misconduct are clearly spelled out and strictly adhered to. The policies should be reviewed annually and certifications from executive officers should be required procedure. Companies should ensure that violations have consequences including an impact on future compensation, triggers for breach of contract and the potential to clawback past compensation. Establishing performance criteria for incentive based compensation centered on improving workplace practices should also be considered.
- Extend accountability for noncompliance throughout the organization. Companies should factor in organization-wide accountability for preventing and addressing sexual harassment and misconduct when drafting incentive programs. Companies can also implement 360 degree evaluations from subordinate employees to assess a supervisor’s conduct. Further, consideration should be given to tying compensation to goals that incorporate diversity and gender pay gap milestones.
- Enhance board oversight. It is important that the board set a tone at the top that sexual harassment or misconduct is not acceptable and that inappropriate behavior will be promptly investigated and result in significant consequences. Board diversity in and of itself can help set the proper tone. A board must be informed about the company’s harassment policies and training procedures, their effectiveness and their enforcement. Boards that have not recently reviewed these policies and procedures should do so promptly, and all boards should have a practice of periodically reviewing and refreshing existing policies and procedures to ensure that they continue to reflect best practices as they evolve, particularly regarding reporting channels and accuser anonymity. Boards should ensure that all complaints involving C-suite executives are brought to the attention of the audit committee and that any internal investigation is overseen by a board committee comprised of outside directors.
- Consider the corporate governance implications. Allegations of sexual harassment or misconduct should be dealt with seriously and quickly. Prolonged investigations should be avoided as they often result in leaks given the salacious nature of the allegations. Company officials should consider whether it is appropriate to close the trading window during the pendency of an investigation. The board should ensure that there are clear expectations about what types of allegations and negotiated payouts or settlements should be escalated by management to the board’s attention. Any allegations or settlements involving a member of the C-suite or key talent should be brought to the board’s attention, as well as any widespread allegations about a group or an area within the company.
