Sexual-Harassment Scandals Are Reshaping CEO Searches

January, 2018

In the Media

Corporate boards have begun taking a tougher stance in vetting CEO candidates out of fear that the scourge of sexual misconduct may reach the corner office.

The heightened scrutiny comes as allegations of sexual harassment topple high-profile men in the media, technology, advertising and entertainment industries. Several prominent executives have lost their jobs following alleged misdeeds that occurred years ago.

Now, for the first time, some directors say they would fire their company’s leader if past offensive behavior came to light during his or her tenure. Other boards are expanding reference checks of CEO contenders or seeking a top executive who can shake up a toxic culture that previously ignored harassment, according to executive recruiters and leadership advisers.

“As board members, we have to put our own elbow grease and time into thoroughly checking out the character of any CEO we hire,” says Brent Saunders, chief executive of Allergan PLC, a pharmaceuticals maker. “Reputation management is becoming an increasingly important component of the valuation of a business,” adds Mr. Saunders, a Cisco Systems Inc. director.

Another veteran director expects that boards soon will ask CEO prospects to divulge more about themselves because directors will insist they accept employment contracts that punish prior sexual harassment or other misbehavior that surfaces later.

“We can fire you for cause” and force repayment of substantial compensation, says the director, who leads several audit committees. “That is the thinking that is going on in boardrooms today.”

The contractual protection is worth looking at, says Charles Elson, a corporate governance specialist and board member for HealthSouth Corp. and Bob Evans Farms Inc.

Even so, it’s unusual. Attorney Stewart Reifler, a Vedder Price partner who negotiates CEO agreements, has never seen contracts that threaten dismissal over subsequent disclosure of pre-employment misconduct. Contracts typically let boards fire a chief for cause due to deliberate neglect of duties, gross misdeeds, a felony conviction or company-related fraud.

Many boards have long required a background investigation, psychological assessment and reference checks before selecting a CEO. Their due diligence doesn’t always go far enough, however, because private investigators sometimes limit executive probes to public records of bankruptcy, drunken driving convictions, divorce and the like.

Some investigators take that approach because it is requested by corporate clients who will make the reference calls themselves. But it rarely reveals lawsuits alleging workplace sexual misdeeds, says Michael D. Allison, head of International Business Research, a corporate investigations firm. “I don’t know that we can dig deeper.”

In 2012, Yahoo Inc. directors ended the brief tenure of Chief Executive Scott Thompson after they discovered he lacked a computer-science degree that his public biography said he had. The company used background checkers to confirm Mr. Thompson’s credentials, a person close to the matter says. It is unclear whether discrepancies emerged before Mr. Thompson took the top job.

Mr. Thompson received no severance pay and lost his unvested Yahoo equity. He now runs Inc., which lets users manage their student loan portfolios. Mr. Thompson couldn’t be reached for comment.

Similarly, psychological evaluations pinpoint leadership capabilities rather than previous improprieties, says Matt Paese, vice president of succession management and C-suite services at Development Dimensions International. The human-resources consultancy conducts executive assessments, which usually involve lengthy interviews and tests to gauge personal values, critical- thinking skills and abstract-reasoning abilities.

Board members who are vetting CEO candidates increasingly ask DDI to divulge “any signal that there might have been past bad behavior,’’ Dr. Paese says.

“Today, they (directors) want a clean Gene,” says Peter D. Crist, chairman of Crist/Kolder Associates, an executive-search firm. “In the past, some boards overlooked the whiff of scandal.”

Mr. Crist has long dug deep before presenting prospective CEOs to directors. “Anything that could embarrass is the screen I am looking for,” he says.

Consider how he scrutinized a contender for the top spot at a services-industry company earlier this year. Mr. Crist was puzzled over why the well-qualified executive had just quit his last job.

The man finally admitted that he had made a pass at a young female colleague after having a few drinks during a 2016 office party. A witness described the episode online. “He was trapped because this was on social media,’’ Mr. Crist says. The recruiter killed the executive’s candidacy.

As boards intensify their review of possible CEOs, pervasive social media make it harder for aspirants to hide prior misbehavior. That’s obvious from the “#metoo” movement, the national online outpouring by sexual-harassment victims this fall after dozens of women accused Hollywood producer Harvey Weinstein of harassment and assault. Mr. Weinstein has apologized and denied any nonconsensual sex

A software company director says it hired a new leader last winter after he scoured social media and failed to find negative comments about him.

Meanwhile, boards in industries hit by sexual-harassment scandals are beefing up the CEO job description to make sure their next leader “can transform a loose corporate culture into a safe workplace,” says Jeffrey Cohn, managing director for global CEO succession planning at recruiters DHR International.

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