Anticipating Harassment: MeToo and the Changing Norms of Executive Contracts

56 Pages Posted: 27 Feb 2021 Last revised: 1 Mar 2021

See all articles by Rachel S. Arnow-Richman

Rachel S. Arnow-Richman

University of Florida Levin College of Law

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy; European Corporate Governance Institute (ECGI)

James Hicks

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Date Written: February 17, 2021

Abstract

The MeToo movement exposed the pervasiveness of high-level, sex-based misconduct at major public companies. It also revealed a workplace culture seemingly permissive of such behavior. Companies responded slowly and imposed few consequences, often allowing culpable executives to depart with lucrative exit packages. Why did companies reward rather than penalize perpetrators? And what will it take to change this culture?

In this Article, we shed new theoretical and empirical light on these questions using the lens of CEO employment contracts. Economic theory posits that CEO employment agreements are not negotiated at arms’ length, resulting in terms that are highly favorable to the executive. We argue that these include generous protections against termination, which leave room for executives to engage in misconduct without fear of reprisal. The MeToo movement represented a major shock to these bargaining dynamics. Facing new reputational and liability risks, we hypothesize that companies will push back on executive bargaining power and exert greater control over CEOs’ behavior—in particular, by reserving broader power to terminate CEOs for sex-based misconduct.

To test our theory, we collect and code a novel dataset of CEO employment contracts executed before and after MeToo. In the wake of MeToo, we find a significant and growing rise in the prevalence of contracts that allow companies to terminate CEOs without severance pay in response to harassment, discrimination, and violations of company policy. We discuss the implications of these “MeToo termination rights” for corporate governance, executive contracting, and gender equity. We conclude that our results offer promising evidence of increased corporate control of CEO behavior and greater accountability for sex-based misconduct in the wake of the MeToo movement.

Suggested Citation

Arnow-Richman, Rachel S. and Davidoff Solomon, Steven and Hicks, James, Anticipating Harassment: MeToo and the Changing Norms of Executive Contracts (February 17, 2021). Available at SSRN: https://ssrn.com/abstract=3787232 or http://dx.doi.org/10.2139/ssrn.3787232

Rachel S. Arnow-Richman (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

James Hicks

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

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