FINANCIAL POST

CORPORATE DIRECTORS BRACE FOR IMPLICATIONS OF #METOO

The wave of sexual impropriety accusations that created the #MeToo movement ever since the high-profile downfall of Hollywood powerbroker Harvey Weinstein is sending ripples through corporate boardrooms everywhere, enveloping the likes of casino king Steve Wynn, John Lasseter, head of Pixar Animation Studios and Walt Disney Animation Studios, and well-known Canadian winemaker Norman Hardie.

Corporate directors are now left grappling with how they would respond to what seems like the inevitable #MeToo-inspired accusation in the senior ranks of their companies. Just as important, they’re wondering whether they have the right pre-emptive measures in place to ultimately protect employees and shareholders.

“When you see all these events piling up and you see the impact of what’s happened, you can’t help but say ‘There but for the grace of God go I’,” said one director, who spoke to the Financial Post on condition that he, and, therefore, his board affiliations, would not be identified.

The potential legal and reputational implications for public companies loom large for the bottom line if it’s found that a corporate culture allows bad behaviour — or even the hint of bad behaviour — to flourish or go unpunished.

“If you get a serious allegation of misbehaviour and all of a sudden the stock price drops 25 per cent … the class-action suits start,” said the long-time director. “And the class-action suits are all going to be around (questions such as) ‘where were you guys, what were you doing, how come you didn’t know about this, or if you knew about this, how come you didn’t disclose these things?’.”

I WOULD SAY BOARDROOMS ARE ON ALERT, IT’S NOT LIKE THERE’S PANIC … IT’S MORE, ‘LET’S REVIEW OUR POLICIES TO MAKE SURE THEY’RE ACTUALLY DOING WHAT THEY’RE SUPPOSED TO DO. — FORMER EXECUTIVE WHO SITS ON BOARDS OF SEVERAL COMPANIES

One class-action lawsuit authorized to move ahead by a Quebec Superior Court judge in late May is being viewed as a sign that Canada has not escaped the sweep of the #MeToo and related Time’s Up movements.

The suit alleges sexual impropriety by Just for Laughs comedy festival founder and former president Gilbert Rozon, but it does not name the organization he worked for at the time of his alleged wrongdoing so it will not test aspects of corporate governance or liability.

Nevertheless, “this may open the door for class litigation for harassment both against individuals and against companies,” said Richard Leblanc, associate professor of law, governance and ethics at York University in Toronto. “Of course, the role of the board in overseeing potential harassing misconduct will also be scrutinized by courts.”

Leblanc said he is advising a number of Canadian directors on the heightened corporate risks associated with the rise in allegations of sexual misconduct and the general focus on relationships with powerful men in the workplace.

Such relationships can even be consensual and still cause trouble. For example, Blair Fleming, a longtime employee of Royal Bank of Canada, lost his job leading the bank’s capital markets business in the United States in June over an undisclosed relationship with an employee.

“Fleming did not comply with our disclosure and conflict of interest policies relating to workplace relationships,” bank spokesperson Gillian McArdle said in an emailed statement. “When the matter was brought forward, we investigated and acted promptly.”

Asked if Royal Bank’s conduct was likely informed or accelerated by the boardroom discussions currently underway as a result of the #MeToo movement, a veteran director, who does not have a relationship with the bank or knowledge of the specifics, said: “I would certainly be inclined to put money on that theory.”

In another recent case of decisive corporate action, Intel Corp. chief executive Brian Krzanich resigned on June 21 after an investigation confirmed he had breached company policy by having a past consensual relationship with an employee.

The reality is, as Leblanc puts it, “Conduct risk right now is front-and-centre for many boards.”

The risks being contemplated in boardrooms go far beyond an individual’s conduct to include corporate culture, reporting mechanisms for bad behaviour and whistleblower protections, according to Leblanc and other legal experts, as well as three veteran corporate directors and former senior executives who all spoke on condition that they not be identified.

One of the corporate stewards said risks flowing from the #MeToo movement have pushed alongside or even ahead of other pressing concerns such as cybersecurity, and boardrooms are discussing more than just what to do if such a situation presents itself.

The concern — and what directors are testing — is whether plans and procedures are already in place to give employees the opportunity to report sexual harassment or assault without fear of repercussions. As well, boards want to see evidence that company employees know how and where to lodge a complaint.

One male director, who sits on a handful boards of blue-chip companies and organizations, said he was surprised to find that employee surveys done in the wake of the Weinstein scandal revealed that few thought to use the company’s whistleblower policies and mechanisms to report such incidents, especially since that’s what the company and its directors expected.

“Everybody thinks about whistleblowers in the context of financial reporting or potentially corruption, bad business practices,” he said, adding that the challenge for directors now is: “How do you make sure people know that whistleblowers, the anonymous approaches … apply to all sorts of breaches of a code of ethics, and bad behaviour is one of those reportable offences.”

Another director said the Weinstein scandal and continuing fallout prompted “several meetings” on topics such as whether codes of conduct and harassment policies and “related training” were up to date. The large companies and organizations also scrutinized “how effective are our channels to report any harassment or inappropriate behaviour,” the director said.

There is much at stake because an accusation, how it is dealt with and whether it was prepared for can have far-reaching implications, particularly at a publicly traded company.

“I would say boardrooms are on alert,” said one director, a former senior executive who sits on the board of a handful of large Canadian companies. “It’s not like there’s panic … It’s more, ‘Let’s review our policies to make sure they’re actually doing what they’re supposed to do ... (so) we can’t be accused of not providing as much as we can in the way of whistleblower provisions, support, etc., in the event that certain things that occur.’”

Legal experts said wellprepared companies already have a code of conduct in place, as well as a track record of enforcement and repercussions for anyone found in breach of the expressed expectations.

“A policy that is not enforced can be meaningless,” said Rima Ramchandani, cohead of the capital markets practice at law firm Torys LLP in Toronto.

Handling repercussions, or consequence management as it’s known, was the topic of one #MeToo-related conversation involving a director interviewed.

“Consequence management is what happens if you do violate the code of conduct, and in some organizations I’ve been in, it does include termination, depending on how serious the infraction is,” the director said. “Have reports been handled fairly (and with consequences where appropriate)?”

Leblanc said some directors he has spoken with are looking at doing much more than they have in the past, such as implementing personality tests and performing enhanced background, social media and reference checks for both potential new hires as well as existing executives and directors.

“Boards are also requiring full disclosure of past indiscretions, events or activities that could bring reputational harm to the company. They do not want surprises,” said Leblanc, the author of an article Harvey Weinstein: Could it happen to your board?, in the wake of the first prominent Hollywood mogul to be toppled last year.

“If an officer or director has nothing to hide, then there is no reason to object to enhanced checks and internal controls, in complying with the fiduciary duty to act in the best interests of the company,” he said.

Until that happens, more allegations of misdeeds are likely to arise.

Following Weinstein’s ouster last October from the production company he founded amid allegations of sexual misconduct, the #MeToo movement was born, ushering in a wave of women whose accusations have felled the careers of media personalities including Charlie Rose and politicians such as former senator Al Franken.

In Canada, the former leader of Ontario’s Progressive Conservative party, Patrick Brown, denied accusations of sexual misconduct but nonetheless stepped down in February.

In the corporate world, Norman Hardie, founder of a highly regarded winery in Wellington, Ont., that bears in his name, admitted on June 20 to some, but not all, of the sexual misconduct allegations that had been levelled against him a few days earlier. None of the allegations against the men above has been proven in court, but the fallout for Hardie was quick.

The Société des alcools du Québec quickly pulled his winery’s products from its shelves after the allegations became public. The Liquor Control Board of Ontario initially stated it would let consumers decide whether to buy Hardie wines, but later said it would not make any new orders. Individual restaurants have also decided to stop serving the wines.

In the United States, casino king Steve Wynn left his position as chairman and chief executive of the gambling powerhouse that bears his name, Wynn Resorts Ltd., following media reports of sexual misconduct spanning decades. Investors responded by knocking about 20 per cent off the company’s stock price.

The 76-year-old mogul, who was deeply associated with his company’s brand and resorts on the Las Vegas strip, including the Mirage and Bellagio, blamed “an avalanche of negative publicity” for his departure, which he said took place in an era where “a rush to judgment takes precedence over everything else, including the facts.”

Ramchandani, the Torys lawyer, said public companies face unique challenges with the #MeToo movement, because there is “increasing public pressure to respond swiftly.”

For example, concerns about due process, particularly since many of those accused of sexual misconduct have denied any wrongdoing, may force companies whose shares are traded on an exchange to act decisively.

“If rumours surface and impact trading, public companies may be required by stock exchanges to promptly make a public statement in response. Being silent may not be an option,” Ramchandani said. “Failing to take appropriate action can affect the bottom line, potentially resulting in a public relations backlash and employee disengagement.”

Legal experts suggest boards consider using outside auditors to ensure their practices and procedures are not unduly influenced by self-interest. Outside investigators, where warranted, can also help ensure the process is fair to both the accuser and the accused.

“Well-advised boards can strike the right balance: responding swiftly but in a manner that is respectful to all parties involved,” Ramchandani said.

The re-examination at the board level could even lead to changes in the processes companies undertake when acquiring a new firm or service provider, governance experts said.

For example, companies looking to acquire a company may put more emphasis on due diligence “aimed at understanding the culture of the target business and its history of employee complaints,” Ramchandani said.

Larry Ritchie, chair of risk management and crisis response at law firm Osler, Hoskin & Harcourt LLP in Toronto, said “tone from the top” is important when it comes to dealing today’s “evolving” corporate governance landscape, which includes the rise of public allegations of sexual harassment.

“Boards must ensure that all employees and executives understand and meet their obligations to each other,” he said.

Efforts should include ensuring that systems and procedures are put in place, or maintained if they are already there, along with a road map for consistent monitoring and ongoing enhancements.

Boards must also ensure all employees know that complaints and concerns will be confidentially received and seriously considered. For those who complain, Ritchie said, there must be a path to do so “without fear or concern that they will be met with retribution or negative career consequences.”