Boards of Directors in the Bullseye: #MeToo and the Fiduciary Duty

By Elizabeth Torphy Donzella - Shawe Rosenthal LLP

November 29, 2018

Allegations of sexual harassment perpetrated by top officials are not new, nor are lawsuits or threats of lawsuits based on those allegations. Wise companies take such matters seriously and, if they conclude that the allegations have merit, take action not just to resolve the matter with the complaining party but to root out the problem so it does not reoccur. Fire the offender, change the culture and move forward.

The #MeToo movement has, however, peeled back an ugly veneer: that when the offender is a “master of the universe” – a powerful, revenue generating, man (usually) or woman (occasionally) with undeniable talent in his/her field – corporations and their boards too often have “taken care of the problem” of the moment with confidential settlements and then continued with business as usual. Harvey Weinstein’s predatory behavior apparently was deemed a “cost of doing business” because his employment contract (approved by his company’s board), included a graduated scale of penalties for each legal claim his conduct generated and a requirement that he pay the costs associated with these legal matters.

In the wake of this, eyes are turning to corporate boards of directors. Traditionally loath to get too involved in corporate personnel matters, questions are now being raised about whether their actions or inactions concerning workplace harassment constituted breaches of fiduciary duty. It has happened at places like National Public Radio (a not-for-profit entity whose reporters often do exposés on misconduct by corporate or government officials). In a story on NPR’s website about the matter, NPR conceded that its own board of directors was being questioned about their commitment to address the management culture that allowed predatory behavior of a key former executive to go on for years.

How corporate boards have addressed harassment claims against top executives also are generating lawsuits alleging that the boards breached their fiduciary duties in either tolerating or being willfully blind to obvious executive misconduct to the detriment of their companies (and their shareholders). A recent example is Lululemon, which is facing a shareholder derivative suit alleging that the company’s board did nothing to address sexual harassment and bullying by the former CEO that created a “toxic culture” that damaged the company’s financial position. The lawsuit also attacks the $5 million dollar severance package given to the exiting CEO as another breach of fiduciary duty.

The takeaway here is that boards of directors must accept that personnel matters are within the realm of their “their business.” In that regard, some of the actions boards should take include:

• If the board does not have a personnel committee, establish one. Make sure those who sit on the committee are knowledgeable about human resource practices and employment law.
• Boards should not simply accept the “report outs” from management that a personnel matter has been investigated and resolved when that matter involves allegations of serious misconduct, particularly by key employees. They need to ask questions and may need to retain independent investigators that report directly to the board.
• Boards must demand to be informed about proposed payments made to resolve any significant complaints (to complainants and to accused executives who exit). The proposed terms of such resolutions must be examined to make sure that they are appropriate (and that the resolution does not neglect the root cause of any problems).
• Finally, boards should not assume that the corporation has adequate policies and procedures in place to prevent and remedy harassment and other legally significant complaints. Interviewing human resources personnel about procedures, reviewing company policies, and examining whether there are robust avenues for complaints to be raised involve the unfamiliar role of the board in digging-in to the “nitty gritty.” The fiduciary duty of the board of directors now demands it!