SEXUAL HARASSMENT/MISCONDUCT IS AN INVESTMENT ISSUE Trustee Framing Statement and Questions For Engaging Investment Staff, Consultants and Managers

Over the past year, it has become clear that sexual harassment is a relevant and material issue for investors.

On January 26, 2018, revelations surfaced of dozens of allegations of sexual misconduct committed over decades by Steve Wynn, founder and CEO of Wynn Resorts. The company’s share price dropped a stunning 18% - wiping out more than $2 billion of shareholder value – over the following two days. The impact to the company did not end there. Four days later, the Nevada Gaming Commission, which “consists of three full-time appointees and has the power to assess fines, revoke licenses and halt commercial activity” (After Sexual Misconduct Claims, Vegas Mogul Steve Wynn Fell Fast, 2018), launched an investigation into the allegations. Just a day after that, “the Gaming Commission in Massachusetts, where Wynn Resorts is building a resort that is expected to open in 2019” (After Sexual Misconduct Claims, Vegas Mogul Steve Wynn Fell Fast, 2018), launched its own investigation. Shareholder lawsuits and insider trading allegations against five Board members and the CFO also followed.

In October 2017, “The New York Times publishes a story detailing decades of allegations of sexual harassment against Harvey Weinstein” (Harvey Weinstein Timeline: How the Scandal Unfolded, 2018). Over the subsequent months, dozens of allegations surfaced. Just over six months after The New York Times article, the Weinstein Company filed for bankruptcy.

The reputational damage caused by public allegations can lead to a precipitous drop in share price and shareholder value. Today, intangibles, including reputation and brand, comprise the bulk of a public company’s value. “Intangibles have grown from filling 20% of corporate balance sheets to 80%, due in large part to the expanding nature, and rising importance, of intangibles” (How Intangible Assets Are Affecting Company Value In The Stock Market, 2017).

But also, addressing allegations is costly to a business – both the investigations and the potential settlements. "These investigations, if done thoroughly, can be extremely expensive, in the range of $20 million to $40 million, given that the allegations span three decades, two continents, and involve potentially dozens of individuals," said Debra Katz, a partner with Katz, Marshall & Banks (With Harvey Weinstein Out, the Weinstein Company Faces Serious Challenges, 2017). The problem is not limited to the actions of top executives. “[M]isconduct by a chief executive can reverberate across aspects of even the largest companies. ‘If you have a company with an abuser on the top, they typically surround themselves with people like them, who engage in similar behavior,’ Debra Katz, a lawyer specializing in sexual harassment, told [Ronan Farrow of the New Yorker]. ‘It can put a set of enablers in place, who protect powerful people when they get challenged for misconduct, and who work to discredit and manage out women who come forward with allegations.’” (Les Moonves and CBS Face Allegations of Sexual Misconduct, 2018)

A corporate culture that is permissive of sexual harassment and misconduct and that retaliates against whistleblowers not only opens itself up to legal action and potentially significant settlements, but it also can face other issues that erode corporate performance. In a 2017 article in the New York Post, Catey Hill listed five additional ways sexual harassment can impact a company’s bottom line – employee turnover, lower productivity, venture capital funding issues, customer flight and recruiting challenges (Preventing Sexual Harassment Can Save Companies Millions, 2017).

Wall Street today is beginning to recognize the financial risk associated with sexual misconduct. Bloomberg reported "Advisers are adding guarantees to certain merger agreements in light of the sexual misconduct scandals that have enveloped the producer Harvey Weinstein and other high-profile businessmen -- ones that legally vouch for the behavior of the company's leadership.... In some cases, buyers have even negotiated the right to claw back some of the money they paid if subsequent revelations of inappropriate behavior damage the business" (Wall Street Is Adding a New 'Weinstein Clause' Before Making Deals, 2018).

Investors must address this risk to portfolio performance – through policy, proxy voting and engagement, among other approaches.

Question 1: Given that sexual misconduct can impact corporate value and portfolio performance, what policies and processes in both public and private asset class investments do we/you have in place to monitor and manage the operational risk, as well as the financial and reputational risks, arising from sexual harassment?

Question 2: Further, how have we/you incorporated these risks into public and private asset manager selection/renewal and proxy voting guidelines?

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Bibliography

Ahmed, N. (2018, August 5). Wall Street Is Adding a New 'Weinstein Clause' Before Making Deals. Bloomberg.

Berg, N. R. (2017, October 2017). With Harvey Weinstein Out, the Weinstein Company Faces Serious Challenges. Forbes.

Farrow, R. (2018, August 6). Les Moonves and CBS Face Allegations of Sexual Misconduct. The New Yorker.

Harvey Weinstein Timeline: How the Scandal Unfolded. (2018, May 25). BBC News.

Hill, C. (2017, November 3). Preventing Sexual Harassment Can Save Companies Millions. Washington Post.

Khalon, R. (2018, March 15). After Sexual Misconduct Claims, Vegas Mogul Steve Wynn Fell Fast. NPR.

Skroupa, C. P. (2017, November 1). How Intangible Assets Are Affecting Company Value In The Stock Market. Forbes.

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