Boards have long been criticized for showing too much deference when it comes to finalizing CEO employment agreements. Typically, “for cause” provisions that would eliminate severance benefits have been narrowly defined and have avoided addressing behavioral risks such as sexual harassment.
A recent academic study examines whether the reputational and liability risks arising from the #MeToo movement have pushed boards to include behavioral misconduct provisions in employment agreements. The
paper, by Rachel Arnow-Richman of the University of Florida and Steven Davidoff Solomon and James Hicks of UC Berkeley, found that this has been the case:
- For 2015 – 2020, the percentage of companies including a specific clause in employment agreements for harassment or discrimination increased from 4% to 12%.
- The percentage including a provision regarding violations of company policy increased from 57% to 69%.
- Additionally, boards decreased the use of CEO protective provisions such as the “opportunity to cure” from 71% to 67% and the need for a supermajority board vote to approve a termination for cause from 27% to 18%.
However, the authors also highlight high levels of ongoing risks, such as the fact that narrowing language continues to bind boards. For example, while the contract may include a misconduct provision under “termination for cause,” misconduct may be narrowly defined to require thresholds related to intent, seriousness, or harmfulness that limit the board’s discretionary authority.
Overall, the paper makes the case that companies are addressing sexual harassment concerns, albeit slowly and imperfectly. The shift to including these behaviors under “termination for cause” is a positive first step, but boards should not constrain their ability to address behavior through overly restrictive language in the agreement.
