Robust internal controls are vital for companies to detect and remedy fraud, waste and abuse, i.e., embezzlement, as a component of its financial oversight. Incorporating similarly robust internal controls for addressing sexual harassment complaints must be a priority, particularly when the targets of such claims are executive or C-suite leadership for publicly traded companies.
The rapid downfall of Steve Wynn at Wynn Resorts is a cautionary tale detailing why incorporating such systems is of paramount importance. The Wall Street Journal recently recounted several instances where implementing a dynamic internal controls system would have provided senior management, and the board of directors, with proactive measures to change the company’s culture prior to Wynn’s speedy demise from the company late last year.
Step 1: Tailoring Investigative Measures by Employee Category According to The Wall Street Journal, Wynn paid $7.5 million in 2005 to a manicurist who he allegedly forced to have sex with him. It is true that companies routinely settle discrimination claims as strategic business decisions that often have more to do with internal priorities versus the actual allegations. However, making such a large payment for a low level employee’s complaint should have forewarned the company’s senior management, and the board, to be expressly sensitive to complaints involving Wynn’s conduct, particularly towards lower level employees with little economic independence.
The board has since created a special committee to investigate Wynn’s overall behavior. But, many companies regularly refer allegations involving executive leadership to a certain subset of pre-determined internal investigators, or hire outside counsel who are empowered to conduct good-faith inquiries critical to withstanding legal scrutiny. Signaling to shareholders and employees alike that companies are dedicated to its duty of responsiveness to allegations of that nature should be a top priority in this #MeToo environment.
Step 2: Sexual Harassment Training is Mandatory for All The Wall Street Journal described Wynn’s testimony in a deposition that he did not receive regular sexual harassment training “because he didn’t need it.” Wynn Resorts’ policy required all employees to receive preventative sexual harassment training but Wynn opted out. Company culture is initiated at the top. Wynn’s disregard for undergoing any training was not about him but set the tone for how seriously the company espoused its values. That is, if the CEO does not believe sexual harassment training is worth his/her time, why should any main-line employees take it seriously? This type of belief understandably indicated to employees that sexual harassment might be permissible and/or tolerated within the company since the CEO did not value the same for himself.
Step 3: Instituting Meaningful Confidential Hotlines The Wall Street Journal reported that Wynn Resorts’ confidential hotline was exclusively reserved for accounting and securities issues. As a matter of internal compliance, maintaining a confidential hotline that does not accept harassment or discrimination issues is a stunning disclosure.
The Wall Street Journal documented the cases of multiple employees who endured Wynn’s harassing conduct for more than a decade. The company’s confidential hotline could have, and should have, warned its executive leadership, and the board, of the numerous complaints that otherwise ended with the relevant supervisors or never made it past the vice president of human resources. Many companies route any and all grievances identifying executive leadership through a certain cascading system that ultimately ends with the Board’s Chair or Audit Committee. If the hotline was properly utilized, the board of directors would have been immediately notified of many inappropriate encounters experienced by employees with no other good options well before The Wall Street Journal’s reporting.
Step 4: ALL Complaints Must be Investigated, Especially Against C-Suite Personnel In its article, The Wall Street Journal quoted a written statement from Wynn Resorts’ policy that requires employees “to speak up,” first and foremost. Yet, complaints about Wynn were handled differently. Some were rerouted away from human resources to the operational side of the business. When those complaints went nowhere, one salon manager took the complaints of his direct reports to the COO, who promised to have a conversation with Wynn. That conversation likely never occurred.
The law requires companies to investigate internal complaints, including those naming C-suite personnel, to reap the benefits of an affirmative defense. It is even more vital in the court of public opinion for companies to investigate all complaints of sexual harassment against executive leadership or else face the growing backlash by consumers who are newly vocal with their criticisms via social media. It happened with Wynn Resorts, along with Charlie Rose at CBS/PBS and Mario Batali at the Food Network.
Step 5: Swift and Effective Remedial Action Taking swift and effective remedial action to address credible instances of sexual harassment, especially for publicly traded companies, is critical for companies in this #MeToo age since the rapid departure of a CEO, like Wynn, can be calamitous for shareholder value and reputational branding. It is not sufficient for companies to pay off the most egregious cases in the hope the problem goes away quickly. For Wynn Resorts and other companies, reorganizing the board of directors to increase the population of both female members and independent directors with no specific loyalty to the former CEO has become a popular tactic. Another alternative for companies going forward could be to install an ombudsman who is vested with authority to restructure responsibilities and leadership roles designed to reshape a company’s culture towards transparency and accountability for bad actors.
There are a host of imaginative options available for companies to create environments that are free of the toxicity associated with harassment-laden company cultures. Protecting shareholder value and reputational branding in a social media driven society demands vigorous internal controls designed to meet that goal.
Sonja J. McGill is a partner with Bell Nunnally & Martin in Dallas. She can be reached at email@example.com, or via the firm’s website.