#MeToo? – Why Third-Party Diligence Must Change

Sexual misconduct by counterparties is a problem that risk professionals cannot neglect

#MeToo is in the news again, and it is there to stay. Ray Kelvin, the former chief executive of fashion brand Ted Baker, who was ousted in March amid allegations of workplace harassment (which he has denied), is reportedly considering a bid to take the company private. This raises moral, legal and financial questions for those exposed to this potential deal.

As the ultimate outcome for Ted Baker’s many stakeholders hangs in the balance, they will be hoping the company avoids the fate of The Weinstein Company LLC, the former film production studio headed by Harvey Weinstein. After the fallen movie mogul was accused by over 100 women of rape, sexual assault or harassment, it filed for Chapter 7 bankruptcy in June, its assets scooped up by private equity, and its unsecured creditors left to fight over the scraps.

The trail of individual victims left by Weinstein’s alleged behaviour has been well documented by the me too movement, an unprecedented wave of self-reported sexual misconduct allegations against prominent figures, shared by victims online. They gained a voice through social media, and were given momentum by investigative journalists, who have backed up many of the allegations through rigorous source-work and fact-checking. 

Undoubtedly, the human cost of sexual impropriety in the workplace is by far the most important part of the story uncovered by me too. The financial and reputational costs incurred by businesses and other stakeholders linked to the alleged perpetrators is another crucial but less obvious aspect.

Take the actor Bradley Cooper, who was cast by The Weinstein Company in the 2011 drama “Silver Linings Playbook”. He is now left fighting in court to recoup millions owed to him by The Weinstein Company following its bankruptcy. Harder still will be the fight to repair his image. In the space of a few years Cooper went from Oscar nomination to public ignominy as one of the alleged “silent men” who continued working with The Weinstein Company despite the longstanding misconduct allegations surrounding its chief executive.

We must change

While the moral argument for not doing business with sex offenders is obvious, Cooper’s example highlights an equally clear commercial case.

Asking about potential sexual abuse by executives was not high on the agenda during a due diligence exercise back in 2011. Even though allegations of Weinstein’s misconduct were known to many industry insiders for years, they were perhaps not considered germane enough to stop some dealing with his company. The Weinstein Company’s downfall disproved that notion. Today billions of investor and creditor dollars all over the world are sitting precariously on the trapdoor revealed by the me too movement.

Not just a “Western” problem

The imperative to identify and deal with me too risks is not limited to potential deals with companies in Hollywood and on the S&P index, where the spotlights of media and regulators are more likely to catch a Weinstein. Slowly but surely, me too is gaining global currency and resetting standards for corporate conduct far beyond the US and Europe.

It remains true that in many emerging economies, perpetrators of sexual abuse are still doing business and receiving foreign capital safe in the knowledge that their victims are too intimidated and under-networked to report abuse. Some foreign governments are even actively suppressing victims’ voices. For example, the PRC authorities responded to me too by censoring social media posts including the hashtag and its local translation, #我也是.

But local censorship and underenforcement will not protect unwary investors forever; as the FCPA punishes US investors in corrupt businesses, domestic public opinion – and by extension the market – will punish exporters of capital to sexually abusive corporate environments.

For US investors, “this is just the way things are done in country X” has not been an excuse for official corruption since 1977. In the me too era, the same standard applies to sexual misconduct at a target company. We are already too late, but better late than never.

How are we changing?

While well-run firms have long known how to react to sexual misconduct allegations (calling in lawyers, and conducting an independent investigation), outside investors have lacked a proactive means of assessing a counterparty’s sexual misconduct risk.

Yet me-too risk management is already within reach. For example, innovative lawyers are now including representations and warranties in M&A contracts to protect buyers from losses incurred by sexual misconduct at the target company. This is an important start, but while legal backstops give some protection from quantifiable financial losses, they offer little protection at all against the potentially massive reputational fallout from associating with businesses led by abusers.

This is why pre-onboarding reputational due diligence is essential. Multinationals need access to on-the-ground intelligence from sources familiar with companies and their managers, speaking off-record, where sources can freely discuss any concerns without fear of personal repercussions.

Businesses cannot gather this intelligence without expert help. It can only be done discreetly, through local sources, and by investigators with the networks and investigative skillset to identify and assess allegations of sexual misconduct. Broaching this subject must be done with sensitivity to local cultural norms, but it must be done.

If there is a silver lining to the Weinstein case and others, it is that the huge commercial fallout from the allegations has brought questions of ethics and human rights into the heart of business decisions – where they belong.