Last month, Jim Duncey, the majority owner and face of Duncey’s Caps, Inc., was involved in a car accident and arrested for DWI.   Facing a PR crisis Duncey’s board of directors called an emergency meeting.  The board implemented its crisis plan, issued a statement condemning driving while intoxicated, suspended Duncey, ordered him to attend rehabilitation, and made a $100,000 donation to MADD. 

While the company survived the initial PR crisis, its bottom line did not.  Retail sales during the following quarter were down 20%.  One of the company’s major commercial customers also terminated its contract that produced $3 million in revenue annually.  To make matters worse, the board’s private investigator discovered that Duncey had previously been arrested for DWI three years earlier while on vacation in another state, but had managed to keep it quiet.  Does the company have any legal remedies against Duncey on top of terminating him?  Should the company seek those remedies?

Can a Company Recover Damages from its Executive?

Last month we talked about a number of examples where company executives’ poor conduct came to light.  A PR crisis plan is paramount, and some companies have successfully implemented, but others have not.  An interesting question is whether a company can recover any financial damages from the executive.  The only truly correct answer to that question is it depends.  Does the executive’s contract with the company contain a morals clause that covers the executive’s poor conduct?  If so, the company may have contractual remedies.  If no morals clause exists, the company may be able to recover on a breach of fiduciary duty theory.  However, that claim will likely hinge on the type of conduct the executive engaged in.  For example, an executive who gets a DWI while attending a social function is likely not violating a duty of loyalty to the company.  But, an executive who sexually assaults company employees on company property is probably breaching a duty of loyalty and care to the company.  A company may also be able to recover certain costs for participating in, and assisting with, the criminal investigation and prosecution of an executive under the Federal Mandatory Victims Restitution Act.

Should a Company Seek to Recover Damages from its Executive?

The tougher question for any company’s board of directors is whether it should seek to recover damages from the executive.  The board has to weigh competing factors: sending a message that it had, and wants, nothing to do with the executive’s improper conduct versus the potential continued negative publicity.

Sometimes, however, the company’s choice may be made for it when the executive initiates litigation first, leaving the company to have to deal with the continued negative publicity.  The current Papa John’s saga is a perfect example.  Given the continued media coverage, the company’s board should consider taking the gloves off and going after the executive to recoup some or all of its losses.

Tilting the Scales in Your Favor

Because company executives are so vital to the face of the company in today’s 24-7 world, companies should always maintain a “buyer beware” mentality.  Companies can protect themselves by including clauses in their executives’ employment agreements that provide for the forfeiture or disgorgement of compensation, as well as the right to recover additional damages, in the event the executive commits some heinous act, criminal or not.