Tech investors and the 'Weinstein Clause' - avoiding tomorrow's #MeToo moments

Profile picture for user catheverett By Cath Everett April 11, 2019
Summary:
Investors are starting to introduce so-called ‘Weinstein clauses’ into deals with tech-start-ups to ensure their investments are not put at risk over sexual misconduct allegations against the management team. But are they likely to make any difference?

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Allegations of sexual harassment in the male-dominated tech industry are nothing new. For example, thousands of Google staff around the world staged a series of ‘Walkouts for Real Change’  in November last year because of the issue as well as claims of gender inequality and systemic racism.

Last month, Microsoft likewise hit the headlines, when an email chain, in which dozens of female employees shared their stories of sexual harassment and discrimination, was leaked. Chief People Officer Kathleen Hogan subsequently responded, saying she had raised the issue with the senior leadership team and would personally look into claims that had previously been passed over by HR.

But such activities are only the latest manifestation of the #MeToo movement, which was triggered 18 months ago when women publicly made allegations of sexual misconduct against US film producer, Harvey Weinstein, for the first time.  In the months that followed, the movement gained in momentum as women around the world shared stories of being harassed or assaulted in the workplace by those in positions of power.

And the movement has certainly had an impact. By the end of last year, The New York Times reported that #MeToo had “brought down 201 powerful men”, nearly half of whom were replaced by women.

So in light of this situation, it is hardly surprisingly to learn that growing numbers of US investors, particularly in the tech sector, are starting to include so-called ‘Weinstein clauses’ in their deals, especially when purchasing start-ups.

These clauses generally consist of the creation of an escrow account during the due diligence stage, whereby the seller creates a warranty guaranteeing that sexual misconduct has not taken place and places an agreed chunk of the proposed purchase price into a bank account.

Should any issues materialise, and if the proposed purchaser still wants to proceed with the transaction, the seller is obliged to pay them penalties, which effectively lowers the purchase price. Although such clauses vary, according to Helen Hughes, legal director at UK law firm Shakespeare Martineau, they tend to require that:

There are no allegations, complaints or claims of sexual harassment made against any director, officers or employees of the company, and so far as the [warrantors/sellers] are aware, there are no facts, or circumstances, likely to give rise to any such allegations, complaints or claims.

Risky business

Although Weinstein clauses are not yet widespread in the US and have yet to reach UK shores, they are expected to become more common as time goes on – and, as such, to exert more pressure on organisations to prove they have not taken part in such activity.

This is because they “focus minds”, says Hughes, placing “a flashing red light” over the sexual misconduct issue at a time when female rights are a hot topic anyway.

The key issue from an investor’s point of view is one of managing risk. Laurie Girand, president of I’m With Them, a website that introduces people who have experienced sexual misconduct from the same perpetrator as a means of empowering them to act together, explains:

It’s not that it wasn’t a risk before, but people were less aware and concerned and they didn’t understand the magnitude. But now for fiduciary reasons, sellers don’t want to lose out on whatever the value of the company is as they have a responsibility to their shareholders. Also depending on the industry, a lot of value is tied up in the management team, so as a purchaser, you don’t want to find out they’re bad apples or you may not end up getting value for money.

Rebecca Gill, director of Women’s Research Institute of Nevada and associate professor in political science at the University of Nevada, Las Vegas, agrees:

Sexual harassment has become a new source of risk, so it doesn’t surprise me that investors would want to know what they’re getting into. But the situation also changes the incentive structure. The strategy of dividing and conquering those reporting misconduct and keeping things quiet in-house is a strategy that doesn’t work any more and has significant consequences in both financial and reputational terms.

Moreover, the fact that it is now investors who are taking action is significant. Gill explains:

Investors speak the same language as the business. You can tell companies they should have better policies and work to improve the culture for women, but it doesn’t resonate or cause a movement. Having powerful external groups saying they won’t have anything to do with you in the case of sexual misconduct, on the other hand, sets up an incentive structure that leaders are more used to responding to. Of course, CEOs aren’t all bad people or uncaring about issues of gender equality, but generally the things that move them to change are those that have direct and measurable consequences on the bottom line.

Cultural issues

However, there are potential challenges in ensuring that such clauses are implemented effectively. For example, working out potential warranty penalties and remedies is not a straightforward proposition, although more standardised templates for different scenarios are expected to emerge over time.

But Gill also believes that clauses should include incentives for companies to take complaints and allegations seriously and be transparent in how they deal with them. She says:

Clauses need to be written to incentivise good behaviour and not encourage tricky behaviour to keep things from coming out. If sellers quietly let someone resign, they can say to investors that no one has been accused of anything. So there needs to be a reasonable process when doing due diligence to put more weight into focus groups and workplace climate studies. That would help investors understand the true nature of the company culture.

Shakespeare Martineau’s Hughes agrees. In her view, garnering employee feedback to understand how they feel about the organisation and understanding how complaints are handled are both vital to “shine a spotlight on the issue”, which could over time help lead to genuine change. As she points out:

If history is going to be scrutinised as part of a possible acquisition, there’s more incentive to do things properly.

But Hughes also acknowledges creating real change is likely to involve more than simply inserting a clause into a contract. It will instead require serious work to ensure the company culture is a positive and healthy one, in which such unprofessional behaviour is neither accepted nor tolerated.

My take

Sexual harassment has historically been considered a unique situation, in which an individual, or collection of individuals, are abused by a single bad apple. As a result, so the logic goes, if they are dealt with, the situation will be resolved and it will not happen again.

But the evidence seems to suggest that, in a workplace culture where sexual harassment takes place, bullying behaviour, other forms of harassment and micro-aggressions are often more likely to be the norm too. A more supportive, respectful, inclusive culture, on the other hand, tends to have a positive impact on staff productivity, engagement and retention at all levels. Which is a situation well worth thinking about.