From Hollywood to Wall Street, investors confront sexual misconduct risk

The growing number of sexual misconduct cases in Hollywood and elsewhere has captured the attention of Wall Street, as investors concerned about the financial fallout have begun calling for improvements in corporate culture, diversity and transparency to mitigate future damage.

A flood of public allegations against veteran film producer Harvey Weinstein, casino mogul Steve Wynn and others is adding pressure on companies to shoulder more responsibility for preventing abuse in the workplace and more liability when misconduct does occur. Some investor groups believe more women need to be brought into the boardroom and more disclosures are needed in terms of board oversight.

A growing issue

"From Weinstein to Wynn … we have seen how allegations of sexual misconduct can have profound repercussions for companies — damaging operations and reputation, driving up legal costs, driving down share value and casting an ethical pall over a company," Council of Institutional Investors Executive Director Ken Bertsch said in a statement. The council, which represents 130 pension funds that manage more than $3.5 trillion in assets, issued a report on March 1 outlining the ways public company boards can combat sexual harassment. WynnResortMarketCAp

Recent scandals have had significant financial repercussions for the companies involved. In the wake of the allegations against Harvey Weinstein, the embattled Weinstein Co. LLC chose to seek a sale and on March 1 struck a $500 million deal that includes a fund for victims of the producer's alleged sexual misconduct. The new agreement comes after a previous sale plan fell apart and the company warned it might have to file for bankruptcy. Also in the entertainment industry, 21st Century Fox Inc.'s board agreed to a $90 million settlement with shareholders who alleged in a lawsuit directors failed to stop senior executives who sexually harassed female employees. In other industries, Wynn Resorts Ltd. lost nearly $3 billion in market capitalization after dozens of women accused then company CEO Steve Wynn of sexual misconduct that spanned across decades.

In February, Cornerstone Capital Group, a financial services firm with almost $1 billion in assets under management, published a report identifying sexual and gender-based violence, or SGBV, as an emerging investment risk. The group noted converging technological and behavioral trends have made it easier for victims to share their stories, bringing more public awareness to the issue. The group warned, "Issues related to SGBV might evolve into a material financial risk for companies that don't take appropriate action."

Yet while more conversations are being heard around investors' role in mitigating sexual harassment in the work place, it is still early days, said Charlotte Laurent-Ottomane — executive director of the Thirty Percent Coalition, a national organization dedicated to promoting gender diversity on corporate boards.
"The conversation is moving toward sexual harassment," she said, adding, "Today the focus is on getting women on boards with the idea that if a company had a diverse culture, this would be less prevalent. I think we are coming to another level on this, but I don't think we're there yet."

The percentage of boards that currently include sexual misconduct among their oversight responsibilities is still relatively small, said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management LLC and portfolio manager for Pax Ellevate Global Women's Index Fund.

"A lot of the reasons they cite for that are it's not a board issue and it wouldn't be well received and it's something that should be in the purview of management. But when it gets to the point where it affects the whole company — and it almost always does, especially if it's the CEO or someone in a very high position — you're basically doing crisis response," she said, adding that there had been a sharp uptick in allegations of sexual harassment in 2017.

Institutional Shareholder Services counted 62 reported incidents involving S&P 500 companies in 2017, up from just nine reported incidents in 2013.

Diversity and disclosure

Beyond the investment community, Alexandra Higgins, vice president and head of U.S. partner advisory services for ISS Corporate Solutions, said she is also seeing more interest in the issue among companies.

"It's certainly something that our clients on the corporate solutions side are paying more attention to," Higgins said, saying that companies are looking for some underlying data around the issue of sexual harassment and are also having more conversations around "the diversity of their boards and the skillsets of their directors."

Increasing the gender diversity on a company's board and senior leadership team is one of the best steps an institution can take to mitigate sexual harassment, according to Joseph Keefe, CEO of Pax World Funds and president of Impax Asset Management LLC, which runs funds focused on socially responsible investing.

"More women in leadership can have specific benefits in terms of transparency, collaboration and innovation, due diligence, and all the things that build a better culture and a better company," Keefe said in an interview.

Keefe pointed to researchcited in 2015 by Harvard Business Review, which found boardroom gender diversity contributes to, among other things, enhanced dialogue; more effective risk mitigation and crisis management; and higher-quality monitoring of and guidance to management.

While Thirty Percent Coalition'Laurent-Ottomane acknowledged "there is no research that proves a lack of women at the top allows for sexual harassment to fester" she noted "there is research that correlates female representation with greater attention to risk oversight and accountability measures."
Laurent-Ottomane, whose coalition's investors represent more than $3.2 trillion in assets under management, said the first step toward increased diversity is often enhanced disclosure. "When we engage with companies, the ask is not appoint a woman. The ask is to increase disclosure language in their nominating and governance charter," she said, explaining the coalition wants to see public commitments in writing to increased gender, racial and ethnic diversity in the boardroom.

Investor groups have successfully pushed for greater transparency around pay equity Goldman Sachs Group Inc.,Bank of New York Mellon Corp.,Verizon Communications Inc., AT&T Inc., and QUALCOMM Inc., took steps to enhance pay equity disclosure after pressure from Impax Asset Management.

Following shareholder proposals from the investment firm Arjuna Capital, Citigroup Inc. in January 2018 became the first U.S. bank to disclose its gender pay gap through an internal announcement. Bank of America Corp. quickly followed, as did Wells Fargo & Co., BNY Mellon and Mastercard Inc. On Feb. 23, JPMorgan Chase & Co. became the sixth financial company in 2018 to agree to close its gender pay gap.

Natasha Lamb, a managing partner at Arjuna Capital, sees a connection between closing the gender pay gap and reducing sexual misconduct in the workplace: "When women hold the lower paying jobs and in turn have less power in the organization ... that imbalance breeds an unhealthy culture. The symptoms of that are the power dynamics around sexual harassment."

Sex and power

Though the Weinstein case likely represents just one tale among many, experts say it epitomizes many of the failings in organizational behavior that perpetuate workplace harassment. In particular, the studio allowed too much power toWeinsteinRiseFall be concentrated around one individual.

According to a lawsuit filed by New York Attorney General Eric Schneiderman against Weinstein Co. and its executives, the film studio had a "culture of harassment" that was facilitated by the complicity of multiple executives and employees. The lawsuit claims Harvey Weinstein's abuses "remained shrouded in secrecy … through Non-Disclosure Agreements … that prohibited individuals from speaking about their experiences."

Higgins at ISS Corporate Solutions said this culture of secrecy is an inherent risk when there is a "superstar CEO."

"A lot of the company's capital or reputation or value is tied up in the reputation of one person. And once that reputation becomes tarnished, it can affect the value of the company," she said, noting that because of the larger risk, there is an incentive within the company to shield the superstar CEO from exposure.

"It creates a culture of secrecy where instead of bringing something to light, they are so focused on protecting that asset that they don't want to expose themselves to the possibility of a financial risk," Higgins said.

For Weinstein Co., not all of the film studio's current financial woes can be attributed to the recent sexual misconduct scandals. Wade Holden, a box office analyst at Kagan, the media research unit of S&P Global Market Intelligence, noted in an interview that the Weinstein film studio was already in a decline when the allegations against Harvey Weinstein came to light. "Weinstein Co. has been in financial trouble for a while," he said, noting the studio has undergone "several rounds of layoffs over the year." There has also been a significant decline in the studio's output in recent years, with the studio having released just seven films in both 2016 and 2017, down from 11 in 2015 and 15 in 2014. But there is no question Weinstein Co.'s situation has become more dire in the wake of the scandal.

CREDIT: Original article published here spMarketIntel


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