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The “Weinstein Clause” may mark a new era of social due diligence

Weinstein ClauseIf you haven’t heard, a new phrase has joined the #MeToo lexicon of anti-harassment – the “Weinstein Clause.”

As explained in a recent Bloomberg article, this term refers to a contractual clause that is popping up in many M&A agreements. Like other key contract terms, it can make or break the deal. It is designed to protect a buyer from the financial consequences of prior sexual misconduct by the top executives of an acquisition target. The language requires the acquisition to certify that no allegations or settlements of sexual misconduct have taken place related to these leaders. Some buyers even include claw-back terms to recover some of the purchase price if later revelations of pre-close sexual misconduct end up damaging the acquired organization.

Depending on its intent, this type of M&A guarantee/insurance plan may signal either positive or negative change in the way organizations are addressing sexual misconduct in their top ranks.

First the potential negative view. This may be just another example of corporations applying a bandage to a bad situation instead of addressing root causes and prevention. In a sense, such a clause assumes this misconduct is likely simmering in their acquisitions and it may boil over in the future. The problem is that these terms do not get at prevention of the problem.

On the positive side, the Weinstein Clause takes a real step toward protecting shareholder interests. While it looks at past behavior, it also sets a standard for expected future conduct in the merged organization and calls out specific behavior that will not be tolerated. Also, it has sharp teeth, making the acquisition fully accountable for its leadership’s actions.

But why stop here? Perhaps it’s time for organizations to go further. Consider the following potential M&A contractual terms:

  • Disclosure of all sexual misconduct incidents, going beyond the C-suite, with full explanations of remediations and trends over time
  • Claw back of a portion of purchase price if reported sexual misconduct by top management (including those below the executive level) remained unacceptably high over the prior 1-2 years or increased over time, indicating inadequate compliance controls
  • Require a compliance program assessment focused on the adequacy of compliance controls for sexual misconduct with statistics on incidence, remediation and trends

The “Weinstein Clause” has created a stir because it is one of the first signs that boards are taking sexual misconduct seriously and treating it as a real business risk. It also may be an indicator that they are beginning to consider reputational risk on par with financial, operational and legal risks.

Ultimately, a real focus on sexual misconduct by governing boards should go deeper to look at the root causes – unaddressed disrespect of all types.

Such incivility creates a culture where sexual misbehavior, bullying, discrimination, abuse and other forms of disrespect will flourish.

To gauge the civility of an organization’s culture, adequate policies and training are not enough. The behavior and accountability of top leadership play a key role. You can’t delegate ethics. And it seems the “Weinstein Clause” indicates that boards are finally beginning to understand that.

By Mary Bennett

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Ethics &Compliance Matters ™, Navex Global ®

Ethics & Compliance Matters™ is the official blog of NAVEX Global®. All articles posted on the Inside Internal Controls blog originally appeared on NAVEX Global’s Ethics and Compliance Matters Blog. The blog leverage the news, insights and best practices you find here to stay ahead of GRC trends, and take your compliance program to the next level. Read more
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