Executive decisions have consequences

Oct. 6, 2010
In this edition of In the Trenches, Acme investigates what happens when Eros joined the ranks on Mahogany Row.

Acme’s board of directors held its quarterly meetings at the company’s corporate headquarters to address matters that come before it. Several board members traveled from out of town by plane to attend these sessions. Other members, to the extent possible, carpooled to the meetings. Acme reimbursed the board for out-of-pocket travel expenses from of a T & E account established for that purpose. The reimbursements were based on either the airline ticket stubs or the driving distance between Acme headquarters and the individual board member’s home. In the interest of efficiency, Acme prepared the mileage reimbursement checks when the board members arrived and distributed them before they returned home.

Several months ago, Acme’s grapevine began to throb with the buzz that Hugh Blewett, the company’s co-CEO, was involved in a sexual relationship with a subordinate. The rumor was persistent enough to prompt the board of directors to ask questions about this potentially embarrassing executive behavior.

During its informal inquiry, Dawn Shanow, the board chairman, asked Hugh some pointed questions. In response, Hugh submitted an open letter to the board in which he admitted having a friendly relationship with the lady in question. He also explicitly stated that this wasn’t a carnal relationship but, in the interest of Acme’s goodwill, he would terminate the relationship and avoid the woman in the future.

Even so, the board began a formal investigation and retained the services of a private investigator to confirm or deny the assertions in Hugh’s letter.


At the next quarterly board meeting, Dawn informed Hugh of the still-ongoing investigation. It was at this meeting that Hugh explained, for accounting purposes, the company considered the T & E checks as nontaxable reimbursements. He warned that the company policy of reimbursing each carpooling member as if they had driven to the meetings separately might lead to problems with the IRS. The carpooling members who didn’t actually drive their own vehicles might be in violation of federal income tax law if they didn’t report those reimbursements as taxable income.

Two weeks later, the investigator’s final report indicated there was good reason to believe Hugh hadn’t really severed his relationship with the woman. When Dawn questioned him about it, Hugh sent each board member a copy of a sworn statement in which he admitting to the continuing sexual relationship and lying about it at the past board meeting.

After conferring with the rest of the board via conference call, Dawn immediately convened a special board meeting at the Acme building during which he notified Hugh of the board’s unanimous decision to terminate him.

Shortly thereafter Hugh sued Acme for gender and marital-status discrimination in violation of the state’s Human Rights Act and for retaliatory discharge in violation of the state’s Whistleblower Statute

How could this situation have been prevented? How should a lower-level accounting clerk know if a board member’s T & E request is irregular? Was hiring an investigator appropriate in this case? Should a board of directors care about what an executive does outside the job? Could Hugh’s IRS warning be construed as an implied threat? Is lying to the board a terminable offense?

An academician says:

What employees can and can’t do regarding relationships should be clearly spelled out in the Human Resource Policy Manual and employees should be informed of that material in training or briefing sessions. Prohibiting supervisor-subordinate relationships is quite common in companies, and I’ve known of companies that even ban dating among employees.

Hugh’s problem is a bit deeper than his relationship with a subordinate. Actually he might have survived had he told the truth about the relationship, received a warning from the Board and ended the relationship.

But Hugh lied about the relationship and about his expenses. Bottom line — he lost the Board’s trust. If the Board thinks that they can’t trust you and the information you’re giving them, you’re gone quickly or should be gone quickly. The Board is there to protect the interests of the owners (usually the stockholders) and is obligated to move swiftly when it smells something rotten.

Was hiring an investigator appropriate? Definitely! The Board couldn’t have people in Acme do an investigation as these people work under Hugh. So, hiring an outside investigator to get at the truth is probably the only way the Board could be sure that the information they received was valid.

Professor Homer H. Johnson, Ph.D., Loyola University Chicago (312) 915-6682

An attorney says:

Under these circumstances, the Acme board would have been derelict in its duty to Acme had it not terminated Hugh, who absolutely blew it.

Hugh’s first problem is obvious — having a sexual relationship with a subordinate. This can turn into career suicide for anyone in a supervisory position. Why? Legally, the acts of a supervisor or manager are attributable to a corporation as the acts of the corporation itself. An employer is absolutely liable for any adverse employment action, such as termination, taken as a result of or in conjunction with sexual harassment.

Typically, at some point, one or the other partner in the relationship becomes unwilling to continue it. Then Hugh would terminate the female employee and she would claim — quite correctly — that the termination was the result of the ending of the sexual relationship. Thus, a consensual sexual relationship can turn into a case of sexual harassment quicker than the average Illinois car exceeds the speed limit when crossing the Wisconsin state line. So a supervisor or manager who embarks on a consensual sexual relationship with another employee, especially a subordinate, places his or her employer at risk of a sexual harassment claim.

Hugh second mistake proved even more fatal to his career at Acme. He lied to his board of directors when he denied a carnal relationship with the female employee and promised to terminate the relationship. As in a marriage, when the level of trust between employer and employee evaporates, so does the relationship. How could the board trust Hugh with running the company if his word was no good?

While it is tempting to suggest that a well drafted harassment policy coupled with effective training for employees all the way to the top of the corporation could have prevented this situation, the truth remains that people are people and hormones often transcend good judgment and common sense. Hugh got what he deserved.

Julie Badel, partner, Epstein Becker & Green, P.C. (312) 499-1418

A plant engineer says:

There are lots of ways a situation like this could be prevented. Telling the truth and conducting one’s self in a manner fitting a CEO are two that come to mind very quickly. Hugh is smart enough to be the CEO of the Acme Company and not smart enough to know how to relate to others that work for the company.

A CEO is held to a higher standard as the leader of the company. He can’t lead the company if he has a “special” relationship with one person. As CEO, I believe it’s expected by the board of directors that he know this and act accordingly. As CEO Hugh should also know that he should tell the truth. Lying will catch up to you sooner or later. I believe lying to the board is certainly a good reason for Hugh’s dismissal by the board. How can the board or any boss expect someone to be responsible to work properly if they will not tell the truth? Truth telling is a foundation of any relationship, work or otherwise.

This brings us to the board members receiving reimbursements for travel expenses that weren’t incurred. Shame on them. The bookkeeper or lower-level accounting clerk might have been trying to get the receipts from the board members who were to receive a check. When traveling and incurring expenses, a receipt should be turned in to show what exactly was spent. If the board members weren’t doing this then they should report the checks as income on their taxes. Hiring the investigator is totally at the discretion of the board. This would be no different that placing cameras in the plant at exit doors to see what employees might be carrying out of the plant. I don’t think Hugh’s IRS warning is an implied threat. Hugh gave the warning while the investigation was on going and the final report hadn’t arrived yet. I believe that the IRS issue is different that the sexual relationship issue and Hugh’s lying to the Board. Hugh made his bed and now he must sleep in it without working for Acme. It’s time for Hugh to go and time for the Board of Directors to stop getting reimbursements for expenses they didn’t incur.

Jeffrey L. Strasser, Bacova Guild,(540) 863-2656

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