Investigations into sexual harassment a key ingredient for investors

Investor interest in sexual harassment as an issue relevant to corporate governance and shareholder value has seen a significant upward trend for a number of years following the #metoo movement. Key amongst investor expectations are robust and transparent investigations into allegations of sexual misconduct.

In 2018, when the FRC was consulting on the new UK Corporate Governance Code, which ultimately included a greater emphasis on whistleblowing procedures and board oversight of the resultant reports, the PIRC (an influential European corporate governance and shareholder advisory consultancy) predicted a “massive upsurge of sexual harassment whistleblowing reporting” and advocated “stronger enforcement within the company at all levels and an independent audit trail”.

Over the pond, the US Council of Institutional Investors issued a report in March 2018 addressing “How Corporate Boards Can Combat Sexual Harassment”, which noted the “profound repercussions for companies and their shareholders” flowing from sexual harassment allegations, including legal and financial costs, reputational impact and operational disruption and highlighting that in order to “ensure accountability, reports of sexual harassment must be brought to the board’s attention early, treated seriously and investigated thoroughly”. Also in the US, the ISS (one of the world’s largest shareholder advisory companies) includes in its Proxy Voting Guidelines a recommendation specific to sexual harassment, advising that when voting, account should be taken of the company’s policies and oversight measures to prevent sexual harassment, as well as any recent controversies or litigation, and the company’s comparative transparency regarding its policies and initiatives on the subject.

Investor activism on the topic has manifested in shareholder resolutions, such as the one by Arjuna Capital calling on Microsoft to report on its sexual harassment policies and procedures in the wake of allegations of sexual harassment made against Bill Gates. Included in the resolution was a request for results from any independent audits or investigations into sexual harassment allegations.

The trend is continuing globally, with the Australasian Centre for Corporate Responsibility (the ACCR – a shareholder advocacy organisation based in Australia) issuing an investor briefing this month which identifies workplace sexual harassment as a “material risk” and noting the need for investors to understand the range of risks which sexual harassment poses, including “long term financial risks, operational disruptions and reputational damage”.

A consistent theme arising from investor interest in the topic is an emphasis on properly investigating allegations of sexual harassment. The ACCR report refers to proxy adviser Glass Lewis’ views on the importance of investigations as part of the measures to address sexual harassment, noting that appropriate investigations can help to signal that companies are taking the issue seriously which in turn can facilitate greater engagement, openness and diversity within the workforce.

We frequently advise clients on their investigations, as well as conducting independent investigations for others, and this reflects a trend that we have seen in our clients’ approaches to investigations. In the past, allegations of sexual harassment often triggered an almost exclusive focus on damage limitation. Increasingly, however, we are seeing organisations seeking to gain value from the learning opportunities that a proper, fair and independent investigation can bring. The benefits are not just limited to the specific individual(s) concerned, but include:

• identifying potential failures in systems and policies, which if remedied can help to prevent future issues;
• demonstrating a willingness to take action, which encourages further disclosures and in turn reduces the risk that issues will escalate to the point of litigation; and
• deter inappropriate behaviour, in addition to potentially assisting with defending against claims arising as a consequence of rogue employees’ actions.

Given the sensitivity of the subject-matter, the choice of investigator is key, not least because a badly executed investigation could compound rather than improve matters. Increased investor interest will also mean that companies will be subject to greater scrutiny if robust, careful and appropriate investigations are not carried out.

We are always happy to assist our clients with selecting an investigator, or to offer our experience in handling sensitive sexual harassment cases when we are appointed as an independent external investigator.

If you require further information about anything covered in this briefing, please contact Charmaine Pollock or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2021