A Hot Take on a Cold Play: How Properly Negotiated Executive Contracts Can ‘Fix You’ Following Executives’ Bad Behavior

Quick Hits

• The recent scandal at a Coldplay concert highlights the significant reputational risks companies face due to executives’ public missteps.
• Companies may want to carefully define “cause” in executive contracts to include reputational harm, ensuring flexibility to address various scenarios that may affect the company’s image without the obligation of paying severance or accelerating vesting of equity.
• The Coldplay incident underscores the importance of robust “cause” provisions to manage the potential fallout from executives’ actions, both within and outside the workplace.

Executives’ misbehavior can lead to a host of issues from an employment law and employee morale perspective. Companies may also face reputational damage based on their executives’ actions, and may need to move on from that relationship to avoid the executive’s behavior becoming a distraction or linked to the company’s brand. Depending on the terms of an executive’s employment contract, equity arrangement, or other severance arrangement, a company may face financial exposure in terminating the executive’s employment, even when the company has been harmed. Unless a contract’s definition of “cause” has been appropriately addressed, termination of employment following a public incident may require the company to pay severance or vest the executive in outstanding equity. Paying severance in this context may further harm the company’s public perception, and may lead to difficult conversations with stakeholders.

Protections for Reputational Harm

Traditionally, “cause” in executive contracts has been defined narrowly, often limited to clear-cut issues like fraud, embezzlement, or gross misconduct. However, protections for reputational harm (where an executive’s conduct may not specifically violate a company policy or fit within the clearly defined meaning of “cause”) were included in several instances, with those provisions becoming even more common beginning around 2019 (following the #MeToo movement). As the Coldplay incident demonstrates, the outside actions of an executive (or worse, two) may become headline news, putting the company’s brand and business operations at risk, including risks of reputational harm, which may affect the company’s ability to compete in hiring talent or its overall business operations (e.g., exposure to boycotts). Notably, the allegation (whether true or not) of an improper relationship (based on public behavior) can be a concern, even if there ultimately is no relationship, as the mere allegation may place the company in a bad light.

Considerations in Defining ‘Cause’

In preparing and negotiating the definition of “cause,” companies may consider the following:

• Addressing reputational harm: “Cause” may be a technically defined term and, if heavily negotiated by the executive, may be limited. However, the definition of “cause” often covers conduct that could be expected to harm the company’s reputation or business interests, even if it doesn’t rise to the level of criminal activity, violation of company policy, or more obvious “bad” business behavior. Some contracts may go so far as to cover “any action” (or inaction) that causes harm to the company, while others may be limited to “misconduct.”

• Using clear, broad language: Reputational harm provisions can avoid the limitations of overly technical or narrow definitions and instead use broad phrases that can provide companies flexibility to address varying scenarios as they come. Additionally, these provisions can address actions outside of work if those actions affect the company’s image. In addition to engaging in alleged public affairs, these actions may be designed to include nonwork-related actions such as poor social media usage, road rage, etc., among others. When a company’s brand is associated with an executive and the executive places the brand at risk by virtue of his or her actions or associations, a thorough “cause” definition may provide the company with the flexibility to take action.

• Establishing a fair process: Although it is important to protect the company, provisions ensuring a fair process for the executive, such as reasonableness requirements and notice and cure (where possible), are common provisions.

Key Takeaways

The Coldplay incident is a reminder that reputational risks are everywhere. Although terminating executives’ employment generally can be easy (as long as the company is willing to pay), there are circumstances when the company (justifiably) may not want to pay severance or may incur negative public perception (or pressure from shareholders) by paying severance. By ensuring “cause” provisions are robust and broad enough to pick up nonwork items such as reputational harm, companies may have the flexibility to address unexpected executive behavior.

Ogletree Deakins’ Employee Benefits and Executive Compensation Practice Group regularly provides legal updates in response to developments in employment law. Please see the Employee Benefits and Executive Compensation blog for more information.

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