Benefits & Executive Compensation News

When Execs Behave Badly, Paid Leave Is in Play

Sept. 19, 2018, 10:21 AM

Kids get timeouts, CEOs get paid leave. And that gives parents or boards the chance to act and regroup.

The #MeToo movement has brought into sharp focus how companies deal with accusations against an executive or CEO--tensions run high and information hits social media at light speed, Signe Spencer, a senior consultant at the Korn Ferry Institute, told Bloomberg Law.

Former film producer Harvey Weinstein, Travis Kalanick at Uber Technologies, and Roger Ailes at Fox all took some form of leave of absence before ultimately departing. And the Silicon Valley Community Foundation in April put its CEO Emmett Carson on paid administrative leave during an investigation into allegations that he allowed bullying and sexual harassment in the workplace. Carson left in June.

When scandal hits, companies want to avoid the appearance of chaos because the ripple effects can be cataclysmic. Customers, clients, suppliers, and the market can all be affected.

Paid leave lets boards address public demand for action and investigate to determine what actually occurred. Tesla Inc. head Elon Musk has been making waves for smoking marijuana during a podcast and triggering a federal investigation when he tweeted about taking the company private. Company stock shares have dropped 2 percent and speculation has begun on whether he needs to take a leave of absence.

The paid leave maneuver creates a “legally protected bubble of time to make sure a termination decision has all policy ducks in rows,” Andrew Challenger, vice president of outplacement firm Challenger, Gray & Christmas, told Bloomberg Law. This year, 10 chief executive officers have left amid scandal, 13 have been terminated, and 131 resigned, according to data from Challenger, Gray & Christmas.

CEO changes overall are up 15 percent in 2018, and “that’s a significant number,” Challenger said. “It shows that there are a lot of changes happening at the top, which happens during downturns when there are problems with the company, or mergers and acquisitions,” or for other reasons.

For many companies, the safest course from a legal perspective is to put the executive on paid leave, Jason Branciforte, shareholder in the Washington office of management-side firm Littler Mendelson, told Bloomberg Law. When someone is accused of something in the workplace, often no one knows what has happened, so it’s better for the accused to go on paid leave during the investigation, he said.

Contract Stipulations

In some circumstances, however, the executive’s employment contract will determine what action a company takes to control the situation, including whether paid leave is triggered, Branciforte said.

Companies must be careful when taking action against someone with an employment agreement, Branciforte said, because there may be contract clauses on how a person can be discharged, or a clause about who can take employment action, short of termination. “You really need to look at that agreement to see if anything governs how that person can be treated, or risk a breach-of-contract issue,” he said.

Contracts also may stipulate what can trigger action, such as injury to the company’s reputation, or executives not performing duties or even being convicted of a felony, Bill Gerek, U.S. regulatory leader in the executive pay and governance practice at Korn Ferry Hay Group, told Bloomberg Law.

“But before you get to all that, in my view, you have to undertake a process that’s fair to everybody,” and paid leave should be used consistently when bad behavior occurs, Gerek said.

There also should be plans in place for CEO succession, regardless of the circumstances under which an executive is leaving the workplace, Spencer said. Knowing who can take over in the short term, and grooming a couple of future leaders in the long term, can avoid a leadership vacuum, she added.

To contact the reporter on this story: Genevieve Douglas in Washington at gdouglas@bloomberglaw.com

To contact the editors responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com

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