Shrinking margin of error for CEO behaviour
Companies are expecting candour, and they’re expecting the highest degree of transparency from CEOs. The boards I am dealing with are expecting C-suite executives to be beyond reproach, where they weren’t before. After 27 years of being an attorney, I’m seeing the threshold has dropped down very low in terms of what boards will allow.
HAVING a consensual relationship with an employee or an outside client is seen as a no-no for CEOs at many businesses. Not disclosing it to the board – especially in today’s era of emphasis on executive integrity and zero tolerance for misbehaviour – can be worse, as REI CEO Jerry Stritzke has learned.
Outdoor apparel and gear retailer REI said on Tuesday that Stritzke had resigned and would leave the co- op Mar 15 after a board investigation found that the relationship between him and “the leader of another organisation in the outdoor industry” had not been disclosed.
While the investigation found no financial misconduct resulted from the relationship, “the facts led to a perceived confl ict of interest,” board Chairman Steve Hooper wrote in a letter to employees, “which he should have disclosed under the REI confl ict of interest policy, which requires every REI executive to model the highest standard of conduct.”
Stritzke’s resignation comes about seven months after Intel CEO Brian Krzanich stepped down for violating a “non-fraternisation” policy by having a consensual relationship with another employee. The CEOs of two other tech firms, Rambus and Texas Instruments, also departed last summer after unspecified conduct issues that either “fell short of the company’s standards” or violated the code of conduct via personal behaviour inconsistent with “our ethics and core values.” In December, the CEO of electronic component supplier Kemet departed following an investigation into “a consensual personal relationship” the company said was inconsistent with Kemet’s policies.
Whatever the reason for the departure, employment lawyers say boards of directors at many companies – though certainly not all – are quicker to act in an era of increased media coverage about CEO transgressions, # metoo misconduct that increases scrutiny of even consensual relationships and more demands on boards to hold CEOs accountable for risky behaviour.
“Companies are expecting candour, and they’re expecting the highest degree of transparency from CEOs,” said Julie Moore, an employment lawyer whose firm, Employment Practices Group, does investigations on workplace misbehaviour. “The boards I am dealing with are expecting C- suite executives to be beyond reproach, where they weren’t before. After 27 years of being an attorney, I’m seeing the threshold has dropped down very low” in terms of what boards will allow.
Some evidence appears to show an uptick in how much boards are cracking down on executives’ conduct violations. A study by the PwC consulting arm Strategy& in 2017 found that while the number of CEOs kicked out for ethical lapses is small ( just 18 among the world’s 2,500 largest public companies in 2016), they grew from 3.9 per cent of all CEO handoffs between 2007 and 2011 to 5.3 per cent in the years of 2012 to 2016, a 36 per cent increase.
That doesn’t necessarily suggest CEOs are becoming less ethical; instead, factors like a more suspicious public and a proliferation of media mean there is “a smaller margin of error for all parties involved,” the authors wrote.
The percentage might be even higher if it included 2017 and 2018, when the # MeToo movement seemed to speed how quickly companies made decisions about executive departures, even if harassment wasn’t involved.
“The board doesn’t want to be on national TV,” Moore said. “They’re very worried about the media and the perception from media. They’re recognising that the landscape in 2019 is virtually zero tolerance.”
The REI case adds another complex wrinkle to the dilemma of workplace relationships in that it involved the leader of another organisation that the company’s statement referred to as a “partner.”
“The board of directors and I have had a series of tough conversations about my decision to keep private a personal and consensual relationship with the leader of another organisation in the outdoor industry,” Stritzke wrote in a letter to employees. “I should have told the board because my actions created a perceived confl ict of interest to the co- op. Looking back, I recognise I should have been transparent. REI expects high standards from its leaders.”
In a statement, REI praised Stritzke’s performance as CEO but said “errors of judgment were made, and Jerry and the board agree that it is time for a new leader to take the coop forward.” A spokeswoman declined to comment further than the media statement and letters from Stritzke and Hooper.
Amy Bess, an employment lawyer with Vedder Price in Washington, said “the similarity between the confl ict of interest problem here and a personal romantic relationship between a CEO and employees is the need to disclose – that was his biggest problem.” She had not seen REI’s policy, she said, but “my guess is, like most if not all confl ict of interest policies, it requires disclosure if you have a relationship with another party or individual that could reflect even an appearance of impropriety, if not an actual one.”
More recently, some companies have even gone so far as to create a “love contract” for employees to sign about their consensual relationships at work, said Valerie Hoffman, an employment lawyer with Seyfarth Shaw.
“Essentially this is a document in which the couple acknowledges they are in a consensual relationship and that they will notify the employer if and when the relationship ends,” Hoffman wrote in an email following the Intel CEO’s departure. In a message sent on Tuesday, she said public company boards of directors today “have an extraordinarily low tolerance for bad or noncompliant behaviour by CEOs, even CEOs who are otherwise very successful. There has been a sea change in this in the last 18 months.”
Julie Moore, an employment lawyer