The MeToo movement exposed the pervasiveness of high-level, sex-based misconduct at major public companies. It also revealed a workplace culture seemingly permissive of such behavior. Companies responded slowly and imposed few consequences, often allowing culpable executives to depart with lucrative exit packages. Why did companies reward rather than penalize perpetrators? And what will it take to change this culture?
In this Article, we shed new theoretical and empirical light on these questions using the lens of CEO employment contracts. Economic theory posits that CEO employment agreements are not negotiated at arms’ length, resulting in terms that are highly favorable to the executive. We argue that these include generous protections against termination, which leave room for executives to engage in misconduct without fear of reprisal. The MeToo movement represented a major shock to these bargaining dynamics. Facing new reputational and liability risks, we hypothesize that companies will push back on executive bargaining power and exert greater control over CEOs’ behavior – in particular, by reserving broader power to terminate CEOs for sex-based misconduct.
To test our theory, we collect and code a novel dataset of CEO employment contracts executed before and after MeToo. In the wake of MeToo, we find a significant and growing rise in the prevalence of contracts that allow companies to terminate CEOs without severance pay in response to harassment, discrimination, and violations of company policy. We discuss the implications of these ‘MeToo termination rights’ for corporate governance, executive contracting, and gender equity. We conclude that our results offer promising evidence of increased corporate control of CEO behavior and greater accountability for sex-based misconduct in the wake of the MeToo movement.
Arnow-Richman, Rachel S and Davidoff Solomon, Steven and Hicks, James, Anticipating Harassment: Metoo and the Changing Norms of Executive Contracts (February 17, 2021).