Sexual Harassment and Corporate Law

Tronc Chairman Michael Ferro became the latest corporate executive to resign amid accusations of unwanted sexual advances when he stepped down from the helm of the newspaper publishing chain in mid-March. Ferro joins a long list of high-profile executives who have resigned—or been fired—in recent months due to alleged sexual misconduct. Indeed, well before Ferro’s departure, it was clear that the #MeToo movement had reached the c-suite, resulting in resignations and terminations at dozens of prominent companies.

These scandals have caught the attention of shareholders and plaintiffs’ lawyers. In 2017 and the first quarter of 2018, shareholders at four publicly traded firms—Signet Jewelers, Twenty-First Century Fox, Liberty Tax, and Wynn Resorts—filed lawsuits against corporate directors and officers on grounds related to reported sexual misconduct at those companies. These four cases are not the first shareholder suits arising out of workplace sexual misconduct—sex scandals at the pharmaceutical company ICN (now Valeant), the tech giant Hewlett-Packard, the clothing brand American Apparel, and the executive search firm CTPartners all have led to shareholder suits in the recent past. And the latest round of lawsuits almost certainly will not be the last: As the #MeToo movement gains momentum, we can be confident that allegations of corporate sexual misconduct will continue to surface and that shareholder actions will follow.

This ever-more-common category of shareholder litigation raises important doctrinal questions for scholars and practitioners of corporate and securities law. First, under what conditions will directors and officers be held liable to shareholders under state corporate law for perpetrating sexual misconduct or allowing it to occur at their firms? And second, under what conditions do federal securities laws require publicly traded companies to disclose that top executives have been accused of sexual misconduct or that corporate funds have been used to settle harassment claims?

In our article, “Sexual Harassment and Corporate Law,” we identify various legal arguments available to shareholders who seek to hold directors and officers responsible for corporate sexual misconduct. We conclude that in some instances, corporate fiduciaries will indeed be liable to shareholders when workplace-based sexual misconduct occurs at their companies. First and most straightforwardly, corporate fiduciaries violate their duties of care and loyalty when they engage in harassment themselves—and thus put the firm’s resources and reputation at risk for their own personal gratification. Second, fiduciaries who fail to monitor harassment at their firms may be liable in certain circumstances under a Caremark theory. Third, corporate fiduciaries who are aware of harassment but fail to react—or who affirmatively enable harassment to continue—may be sued for breach of the duties of care and loyalty, though this is the category in which the doctrinal case for liability is likely the weakest. Fourth, corporations and their officers and directors face potential liability under the federal securities statutes when they make inaccurate or misleading statements regarding workplace sexual misconduct.

We then go on to consider steps that firms can take to reduce their potential exposure to sexual harassment claims and resulting shareholder suits. For example, boards might insist upon provisions in contracts with CEOs and other top executive that establish clear processes for handling sexual harassment allegations against those executives. Any credible claim of harassment against a top executive would trigger an internal investigation, and if the board concluded that the claim were meritorious, then the executive would be held personally liable for any settlement or judgment costs and litigation expenses. Shareholders can propose such policies themselves and might consider using the tools of corporate democracy to overcome board resistance. We consider this proposal and other approaches that boards and shareholders might pursue in order to catalyze lasting organizational change.

For scholars and activists focused on fighting sexual misconduct, the specter of fiduciary and securities fraud liability in cases of workplace sexual misconduct also raises questions with strategic and normative dimensions. Is it wise to utilize corporate and securities law as tools to address sexual harassment, or would the #MeToo movement be better advised to focus its energy on alternative legal and political mechanisms? On one view, any development that leads corporate directors and officers to devote more attention to combating sexual misconduct at their firms should be welcomed. At the same time, we acknowledge the potential concern that involving corporate law in questions of workplace-based sexual misconduct would divert corporate law from its core objectives—maximizing shareholder value, protecting investors, and promoting the efficient allocation of capital. Ultimately, we conclude that sexual harassment is itself a threat to investors and an impediment to the efficient allocation of human capital and that efforts to use corporate law to combat sexual harassment are in fact consistent with corporate law’s central mission.

Apart from any worry as to the overextension of corporate law, the prospect of corporate liability in cases of sexual harassment raises a separate concern regarding the discursive consequences of framing sexual harassment in terms of the injury to shareholders. In addition, the use of corporate and securities law to regulate workplace sexual misconduct has potential distributional implications that require careful consideration before these tools are widely deployed. Looming are legitimate concerns about the potential for liability to backfire in ways that ultimately work to the disadvantage of the (primarily female) employees who are most likely to be the victims of harassment. We take these objections seriously, though we nonetheless conclude that corporate law still can play a productive role in reducing the incidence of sexual harassment and sexual assault at companies.

With this article, we seek to advance a conversation among scholars, practitioners, and activists regarding the legal duties of corporate fiduciaries to prevent, respond to, and disclose the occurrence of workplace-based sexual misconduct. We also situate the conservation within the broader context of the debate over corporate governance and social responsibility. The intersection between sexual harassment and corporate law, we suggest, illustrates one way in which social-responsibility concerns and shareholder value maximization can be complementary. While we recognize potential pitfalls, we remain optimistic that the use of corporate law to regulate and remedy sexual harassment can benefit employees, shareholders, and society.

This post comes to us from Daniel Hemel, an assistant professor at the University of Chicago Law School, and Dorothy Lund, a Bigelow Fellow and Lecturer in Law at the law school. It is based on their recent article, “Sexual Harassment and Corporate Law,” available here.