London,
10
September
2018
|
13:38
Europe/Amsterdam

When CEOs go bad

Managing the fall-out from an executive scandal

2018 has seen a spate of senior staff parting ways with their employer after high-profile scandals. From cars to books to tech, each sector seems to have its cautionary tale. Social media and the 24-hour news cycle place enormous pressure on businesses to be seen to take action swiftly. But when faced with a misbehaving executive, it's important to deal with the problem strategically rather than panicking.

One dilemma for businesses in this situation is that while investors and the press may be clamouring for heads to roll immediately, a legally-compliant dismissal process generally takes at least a couple of weeks. The alleged misconduct must be investigated, a hearing scheduled, the individual given an opportunity to attend with a colleague or union representative and a decision communicated – and afterwards the individual must be given the right to appeal.

Although businesses in this situation may be prepared to take the risk of an unfair dismissal claim (where compensation is capped at the lower of a year's pay or £83,682) there may be other, more expensive, potential claims. Dismissal (particularly without notice) is likely to result in the executive forfeiting share options and/or a bonus, so there may be breach of contract claims. Likewise, if the executive is a shareholder, he/she may be able to bring an unfair prejudice action if a fair process is not followed. The short and long-term reputational issues need to be balanced against these potential liabilities (and the potential for reputational damage to be magnified by a drawn-out court case).

It is also essential to have a strategy for dealing with the press, whatever stance is taken in relation to the executive's employment. Simply refusing to cooperate with any press enquiries is tempting when the business is under fire but a bunker mentality is unlikely to be in the business' best interests. Whether press enquiries are handled in-house or by a PR agency, it's essential that the business has an agreed line that protects its reputation while not undermining its legal position. It may be necessary to instruct specialist defamation lawyers to get inaccurate or defamatory stories removed – preferably with an apology and correction.

It's also important to bear in mind that firing the CEO and getting in a "new broom" is unlikely to be a complete solution. Convincing customers, investors and the public that the business really has changed is a long-term process which will require a review of governance, organisational culture and transparency with the business' stakeholders.

There is no one-size-fits-all solution: each crisis-hit company will have unique problems and require unique solutions. But good advice and a clear strategy from the outset can prevent a crisis becoming a disaster.

For further information, please contact Head of Employment Jane Amphlett.