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Risk Controls for Stronger Corporate Governance – Directors & Officers and Employment Practices

Mar 16, 2022 Me-Too-Button

The #MeToo movement resulted in a sea change regarding how sexual misconduct in the workplace is perceived. The pendulum has shifted, and rightly so, from a common reluctance to speak up, to a watershed of substantive allegations over the past several years. These claims have resulted in significant liabilities for all types and sizes of businesses.

Recently passed bipartisan legislation prohibiting mandatory arbitration of sexual harassment claims will likely be signed into federal law by President Biden. This is expected to further impact liability exposure since companies and perpetrators will no longer be able to rely on class action waivers and private settlements to protect their reputations.

Employment practices liability insurance (EPLI) has long been used as a hedge against the financial impact of these types of claims. However, insurers are no longer routinely providing this coverage without actually “underwriting” their risk. Companies that do not have risk management controls in place from the top down will find themselves paying higher premiums with limitations of coverage.

Strengthen Employment Practices Risk Controls

Here are some steps companies can take to strengthen their employment practices risk profile as it relates to sexual harassment claims:

  • Ensure that corporate policies are current and reflect best practices. Most insurance carriers provide value-added resources to assist with this.
  • Conduct training to include all employees, including leadership. Attendance and content of the training should be documented. Policies and procedures must be enforced without discrimination or preferential treatment.
  • Establish reporting methods that encourage victims and/or witnesses to come forward without fear of retaliation.
  • Thoroughly investigate all allegations and consistently follow through with remedial and/or disciplinary actions.

As we have seen with several high-profile cases (e.g., Google, Fox News, CBS, Nike, Wynn Resorts, Activision, and Papa Johns) the fallout of bad behavior does not stop with employee lawsuits. Directors and officers (D&O) of corporations can also be sued by shareholders for breaching their duties by permitting misconduct or turning a blind eye.

Related Reading: How to Strengthen Your Employment Practices Risk Management

Don’t Forget Risk Controls for Boards of Directors

As with EPLI, D&O insurance underwriters will also be assessing the risk in more detail by evaluating leadership at the highest level. The board itself must formalize its efforts to protect the company from litigation and reputational harm. To that end they should:

  • Develop a code of conduct that reflects zero tolerance and applies at every level of the organization.
  • Establish a formal committee or assign to an existing committee the responsibility for objectively assessing corporate culture on an ongoing basis.
  • Require periodic updates from HR leadership on compliance, complaints, hotline calls and other metrics.
  • Ensure that any allegations against senior executives are swiftly and impartially investigated and addressed.
  • Develop a crisis response plan in advance, including designated PR and legal counsel.
  • Seek to enhance gender diversity. The makeup of the board of directors is often perceived to reflect the company’s values.

A good D&O policy will provide coverage to defend and indemnify individual directors and officers who are accused of mismanaging this exposure to the detriment of the shareholders or the company itself. But an insurance policy is not a panacea. There are always terms, conditions, limitations and exclusions. Even if the policy does indeed pay the financial toll, the brand reputation can be permanently damaged. Comprehensive corporate governance is always the first line of defense.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.

Lisa Lavelle, Vice President, Risk Advisor, Hylant Executive Risk Practice