Jim Duncey is more than just the majority owner of Duncey’s Caps, Inc. – he’s the face of the company, appearing on billboards, in television and radio ads, and on the home page of the company’s website.  He is one of the most influential and recognizable business leaders in the city.  On Saturday night Jim and his wife Diane attend a charity event at the toniest country club in town.  With a little “liquid courage” Jim was the high bidder at the night’s live auction, which earned him respect (and envy) from those in attendance.  On the way home Jim ran a stop sign and t-boned another vehicle.  The driver of the other vehicle suffered serious injuries that would force her to spend several weeks in the hospital.  Police investigating the accident gave Jim a field sobriety test, which he failed.  Jim ended blowing a .12 BAC and was charged with DWI.  The accident, along with Jim’s arrest, was the lead story on the Sunday news.        

With the face of the company in legal and public relations trouble, Duncey’s board of directors called an emergency meeting to discuss the situation and consider options.  What can they do?

Executives’ Mishaps and Misdeeds are More and More Common

It seems like executives’ conduct is under the microscope more than ever before these days, and for far worse than Jim’s DWI arrest.  Just last week 6 women accused Les Moonves, the CEO of CBS, of sexual harassment.  While those allegations are no doubt troubling for all involved, including CBS’s management team, the management team arguably faces a more difficult task when the accused is the face of the company.  We’ve seen several recent examples: Harvey Weinstein, the founder of the movie production company The Weinstein Company, has faced numerous sexual harassment and sexual assault allegations; John Schnatter, the founder of Papa John’s, was caught on a tape recording using racist language.  And these issues are not limited to executives who serve as the face of the company.  No one can forget Jared Fogle, the pitchman for Subway, was arrested and convicted of possessing child pornography and paying minors for sex.  What do companies’ management teams do in these situations?

Don’t be the Ostrich

A management team needs to have a crisis plan ready to implement if necessary.  That plan should include immediately releasing a statement about the incident, and establish a communications team that will handle all public relations.  Furthermore, if the incident only amounts to an allegation, the company’s management team (usually the board of directors) should call an emergency meeting to appoint outside counsel to investigate the allegations.  The company’s marketing team should also pull any advertising where the accused is the face of the company.

The thornier issue becomes whether the accused is such a persona non grata that they need to be removed from the company’s management.  While the accused may voluntarily step down, that isn’t always the case, as evidenced by the current fight between Mr. Schnatter and Papa John’s board of directors.  Ironically, Mr. Schnatter’s desire to fight to maintain control over the company he founded continues to bring Papa John’s negative headlines, which leads to prolonged depression of Papa John’s stock price.

In those situations where an executive is unwilling to step down, the company’s board of directors will have to stealthily take actions to replace the executive.  This may require the board to rely on a morals clause in the executive’s employment agreement.  If that does not exist, the board will then have to rely on the company’s bylaw provisions for the appointment and replacement of executives.  This is particularly important when the executive owns a significant interest in the company.  In the Papa John’s case, Mr. Schnatter reportedly owns 30 percent of the shares, and the company’s board of directors adopted a “poison pill” defense to prevent Mr. Schnatter from attempting a hostile takeover.

Tilting the Scales in Your Favor

While companies cannot prevent negative headlines impacting their bottom line or stock price, they can plan ahead for deftly addressing them to mitigate the impact.  If you fail to plan, you plan to fail.