Directors and boards face many dilemmas when workmates become bedmates. Fiona Smith and Narelle Hooper report.

    If love is a drug, then some corporate leaders appear to be allowing it to cloud their judgement — hence the reputational carnage of recent “sex scandal” court cases, dismissals and disciplinary action.

    In Australia, the boards of Seven West Media, QBE Insurance and the AFL have all had to crisis-manage romances involving senior executives this year. Overseas, the rollcall of CEOs who’ve been caught up in high-profile cases extends to former Metropolitan Museum of Art chief executive Thomas P Campbell and Priceline CEO Darren Huston.

    Each time a leader is outed for an inappropriate work-based relationship the organisation can suffer. For directors, the concern is a blow to the organisation’s reputation in the eyes of customers, investors and the community — and potentially their own reputation by association. Secondly, boards see the knock-on effects to workplace culture, employee mental health and wellbeing. And, of course, there are financial impacts, on the share price, sales, legal costs and the expense of dismissing and replacing executives.

    Companies experience an average shareholder loss of $US226 million ($284.7m) in the three days after an announcement of a CEO indiscretion, according to a study by Professor Brandon Cline of Mississippi State University in the US.

    Few adequate policies in place

    Despite their vulnerability to the impact of executive misbehaviour, few organisations appear to have adequate policies in place to ensure the consequences are clear.

    The recent Australian cases have sparked discussion about the role and responsibilities of boards in these matters, says Rebecca Davies FAICD, a director of Catholic Healthcare and AICD facilitator.

    “Boards need to take account of the changes in the workplace.

    What was perhaps either acceptable, or at least where a blind eye was turned 30 years ago, is no longer acceptable,” she says.

    David Fagan GAICD, director of Medibank Private and a former chief executive partner at law frm Clayton Utz, says it is less an issue of morality than about risk, accountability and judgement.

    “Some people say it’s not the responsibility of the board to be looking into these matters. I say it is — particularly if it has significant reputation risk. You need to put aside the morality. It is a question of accountability,” he says.

    While workplace romance can make things uncomfortable for others, boards are not there to judge sexual morals, says Serge Sardo MAICD, CEO of FMC Mediation and Counselling.

    “My position is: is the organisation being affected in any way? If two people are having an affair, it is not up to the organisation to judge whether that is wrong, but it is the organisation’s duty to ensure that relationship is not affecting other employees.”

    How should a board react if it finds a relationship brewing — and it is impacting the performance of the people involved and those around them?

    The important thing is that the policies are known, the consequences clear and the issue is managed quickly rather than being shoved under the carpet.

    The extent to which boards get involved is determined when the situation impacts the employees or the organisation. The board must take into account the health and wellbeing of the employees negatively impacted.

    Around 40 per cent of people say they have dated a colleague, according to a survey by CareerBuilder; and 28 per cent have dated someone at a more senior level. This can lead to gossip and innuendo, favouritism and the potential of sexual harassment allegations if it all goes wrong.

    One of the more concerning matters for directors is when a power imbalance occurs, such as when a more senior person — statistically, usually a man — is dating someone lower in the organisational hierarchy — statistically, usually a woman.

    Workplace mediator Catherine Gillespie GAICD says that the first instinct of a board might be to protect the more valuable investment, which is inevitably the more senior person. “The junior person is collateral damage,” she says.

    When the affair involves a junior woman and a boss, 60 per cent of male executives and 65 per cent of female executives suspect pay rises and plum assignments are being traded for sexual favours, according to research by the Center for Work-Life Policy (CWLP) in the US.

    According to Fagan, even if people think they are being discreet, colleagues notice. It can have a corrosive effect on internal relationships and accountability.

    “If you are going to be accountable you are meant to be defending and protecting the reputation of the organisation. And if you are not driving a culture of accountability, are you the right person to be leading the organisation?”

    He says there is another aspect of the damage conflicted relationships can cause. “People think they can control it but they find it can go in all sorts of directions you can’t anticipate” — as the Seven West Media case has shown.

    When an organisation seems beset by sexual scandal, look to the company culture, says non-executive director David Wakeley FAICD, a director of Bank Australia.

    “The fact that many of the scandals seem to involve senior (more powerful in an organisational context) men and less-senior women suggests that the organisation may have cultures that are not optimal for the wellbeing of all staff.

    The lesson — and key observations of the regulators — is that boards need to be doing more in the areas of understanding, measuring and changing culture. “It is not a case of a few bad apples in the barrel, rather it is a case that the barrel itself, the culture of the organisation permits, or in some cases encourages, bad apples.”

    It says a lot about the culture if organisations have policies and they are not be being observed.

    Chair of Sydney rugby league club Wests Tigers, Marina Go GAICD, says, “it is absolutely the board's responsibility to make sure the cultures and values of the workplace are upheld. It is not a nanny state though, so of course what people do in their private lives is their own responsibility.

    “We talk about behaviours in the workplace — what's acceptable and what’s not. We’ve had a couple of issues come up that have caused some confict in the organisation. We’ve turned to our policies and have removed people because of poor behaviour and the impact it has had on the organisation,” she says.

    What does good policy look like for this highly complex issue? “The problem with this is, every incident is different,” says Go.

    “What ‘good’ looks like is an organisation that is well prepared, understands what might happen and how it might deal with it. “As a director, I expect an organisation to have clear and transparent policies, which can be applied consistently. This helps set a culture of appropriate and inappropriate behaviour. These polices should take into account the need to protect the most vulnerable employees, which, in the case of a workplace afairs, is when there is a power imbalance between a senior man and a junior woman.”

    Davies adds, “My personal view is that having a set of principles on these issues — rather than something too prescriptive — is the better approach, as the latter runs the risk that the precise circumstances aren’t covered.”

    Boards can send a strong signal on culture in setting remuneration and key performance indicators for the CEO and their team, by ensuring that they are living by both confict-of-interest and behaviour policies, she says.

    “Who is rewarded and promoted in an organisation sends a very strong cultural signal.”

    Go says these issues can get over complicated. “But if you strip it right back, our duty as boards is to mitigate risk and to make sure that workplaces are safe and productive for everyone.”

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