This is the first in a series of articles covering the various ways directors and officers can be liable. Here, Stephanie Resnick, Philadelphia Office Managing Partner and Chair of the Directors’ and Officers’ Liability Practice Group at Fox Rothschild, and John Fuller, an associate and member of the Directors’ and Officers’ Liability Practice Group at Fox Rothschild, explore the issue of harassment in the workplace.
with co-author John Fuller
Unfortunately, sexual harassment in the workplace is not a new phenomenon. However, the rise and focus of the #MeToo movement has made sexual discrimination and harassment a very significant concern for shareholders. While companies have historically faced liability for the failure to address allegations of sexual harassment or sexual misconduct properly, the #MeToo era has seen theories of corporate and board liability and damages for sexual harassment and misconduct evolve dramatically.
Directors and officers should use this surge in social awareness as a wake-up call and an opportunity to critically assess their anti-harassment policies and the potential liability if company policies are not meaningfully enforced at all levels.
One significant change signaled by recent cases has come in the ability of plaintiff-shareholders to identify specific monetary damages resulting from public allegations of sexual harassment and misconduct. For instance, in the wake of allegations of pervasive sexual harassment and misconduct, executives in a variety of industries have resigned their positions, and shareholder derivative actions have followed. Not surprisingly, these actions not only have focused on the board’s alleged failures to address purportedly known incidents of sexual misconduct within the workplace, but also have connected particularized monetary damages to the company that resulted from the public disclosure of the misconduct. Specifically, recently filed complaints against the boards of these companies have cited the dramatic drop in share prices in the days following the revelations of misconduct, as well as the companies’ downgrade in investment rating as bases of damages. The complaints also include damage allegations based on the impact on stock value of losing an executive that the companies have historically championed as indispensable parts of the companies’ success.
Another shift in the litigation landscape has come in how boards’ prior responses to allegations of sexual harassment and misconduct have been viewed. Prior efforts to “quietly” resolve claims – or sweep them under the rug – are no longer viewed as discrete or even reasonable business decisions. Liability can attach for making private and confidential settlements without actions to prevent further inappropriate conduct.
For example, in lawsuits filed following allegations of widespread sexual abuse of young athletes, the plaintiffs have asserted that the decisions by governing bodies to keep the allegations against the central perpetrator confidential shielded the perpetrator from outside investigation and permitted them to continue a pattern of abuse. In addition, the plaintiffs have alleged that the governing bodies were aware of similar “red flags” surrounding the perpetrator, but worked to conceal the abuse rather than take corrective steps.
These cases, among others grabbing headlines, signal a fundamental shift both in the demonstrable damages from sexual harassment and misconduct and what constitutes an appropriate board response to such conduct in the workplace. It appears clear, however, that implementing an anti-harassment policy and reacting to violations of the policy with settlement payments and confidentiality agreements can no longer be considered a sufficient response without further corrective action. As a result, companies and their directors and officers must reflect on whether their anti-harassment policies and reporting systems truly address and repair the corporate cultures that allow harassment, discrimination and abuse to continue.
A successful anti-harassment policy must be clear and understandable both with respect to what constitutes appropriate conduct and how reports are made and investigated. Further, any anti-harassment policy must be enforced equally at all levels. Regular trainings to employees, management and the board should include specific examples of both proper and improper conduct and should be tailored for the type of work environment and the nature of the interactions that occur between employees. Trainings should also address the roots of sexual discrimination including both explicit and implicit gender bias. Understanding and addressing the subtle preferences and prejudices that affect decision-making throughout the company is a critical step in stopping the development of toxic work environments.
Trainings should also include clear instructions for making a report of harassment or discrimination. Moreover, employees should be provided with a list of various individuals within the company who have been identified to receive and investigate confidential complaints. These designated individuals should undergo additional training to ensure they are prepared to ascertain the material facts that will form the basis of an investigation in a professional, yet comforting manner.
Promptly addressing complaints and reporting them to upper management and the board for corrective action is critical. Indeed, if improper conduct is widely understood and employee reports are received – but management fails to act – the system has utterly failed. Moreover, if complaints, particularly those regarding high-level personnel, such as C-suite officers and business generators, are susceptible to being downplayed or disregarded, liability and substantial monetary damages will result, and criminal charges are also possible. Therefore, reporting structures which remove managerial discretion from escalating complaints and which generate reports to the board no matter how egregious they may be are necessary to ensure that anti-harassment programs remain effective.
While companies strive to eliminate sexual harassment, boards must also fully appreciate the changing liability facing companies today. Boards must take steps to ensure that their anti-harassment policies effectively address sexual harassment in the modern workplace and – most significantly – that they are seriously considered, followed and enforced at all levels of the company. Corrective action must be taken following a confidential settlement if there is a history of sexual harassment involving that particular manager or officer.