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Sexual Harassment Is Becoming a Serious Investment Risk

The Weinstein scandal has sparked an avalanche of sexual-harassment allegations against powerful men, and investors are paying attention. How corporate culture could change.


Harvey Weinstein. Bill O’Reilly. Roy Price. Kevin Spacey. The list of prominent men recently accused of sexual harassment goes on, and on, and on. So, too, do the costs of such behavior, in ruined reputations, aborted careers, and shattered companies, not to mention dollars and cents. Investors also have a lot at stake.

The greatest cost, of course, is borne by the targets of predatory behavior, mostly women, many of whom have been newly empowered to share their stories publicly in recent weeks. The numbers suggest that their experiences are just the tip of an ugly iceberg. According to the Equal Employment Opportunity Commission, one in four women in the U.S. experiences sexual harassment at work. Based on a recent Wall Street Journal/NBC news poll, that figure could be closer to 50%.

Whether or not snowballing accusations of sexual misconduct, and the backlash they have sparked in the U.S. and abroad, are a watershed moment for the culture, as many hope, they are a piercing wake-up call for corporations and investors. Companies that tolerate or cover up sexual harassment, perpetuate a culture that fosters it, or fail to provide proper avenues for employees to report concerns and offenses, could pay in multiple ways, from difficulties in attracting, retaining, and motivating talented workers to customer defections, ruined business deals, and lost revenue and profit.

The Weinstein Co. film studio, for instance, reportedly has been seeking a cash infusion since dozens of women accused its former head, Harvey Weinstein, of sexual harassment or assault, some recent, some in episodes dating back decades. Fox News faced an advertiser backlash before parting ways with O’Reilly, a network star who left the company in the spring amid allegations of sexual harassment, only nine months after Fox ousted its chairman, Roger Ailes, on similar charges. (Fox is owned by 21st Century Fox [ticker: FOXA], which shares common ownership with News Corp . [NWSA], the parent of Barron’s.)

Weinstein has apologized for his behavior. The Weinstein Co. didn’t respond to Barron’s request for comment.

Following the allegations about O’Reilly and others, Fox has overhauled the management and reporting structure at Fox News, and made other changes. O’Reilly has denied the accusations against him.

GIVEN THE SOCIAL cost of workplace scandals, and the toll on corporate and stock-market performance, investors also have a growing role to play. Increasingly, they could find themselves pressuring companies to root out bias and harassment of any sort, and implement better risk-management policies.

While sexual harassment has many causes, it tends to flourish when workplace culture is poor and corporate governance, weak. A dearth of women in the workplace, particularly in board and executive positions, and a lack of gender parity in opportunity and pay, are also contributing factors that have begun to attract investors’ attention.

“For a while, investors were able to say that they couldn’t address what they didn’t know about,” says Stu Dalheim, director of engagement at Calvert Research and Management, a unit of Eaton Vance that engages in “responsible” investing, with a focus on environmental, social, and governance factors in stock selection. “The case is getting stronger for investors to understand that there is risk in many companies. Corporate boards must be much more aggressive in enacting stronger compliance regimes for human resources. Investors should be asking companies and corporate boards to do more.”

Calvert is doing so, and deliberately steering clear or discounting companies dogged by gender-related controversy. For example, though it still owns Dollar General (DG), says Dalheim, it downgraded the company’s score after the company paid to settle a variety of discrimination and harassment suits in the past decade or so. The investment firm also passed on buying Uber Technologies’ loans and other securities, he adds. Uber co-founder Travis Kalanick was forced out in June as CEO of the privately held ride-sharing company, after failing to tame a corporate culture rife with sexual-harassment issues.

“Dollar General is committed to providing its employees with a work environment free from unlawful discrimination, including individual harassment,” a company spokesperson said. The retailer doesn’t comment on pending litigation.

Uber didn’t respond to Barron’s request for comment.

Eve Ellis, a portfolio manager with Morgan Stanley ’s Matterhorn Group, says she generally avoids investing in companies facing class action or individual lawsuits dealing with gender. “They might cost a company money, and lead to reputational risk,” she says.

In the aftermath of the Weinstein revelations, which prompted the current public reckoning, Habib Subjally, a senior portfolio manager at RBC Global Asset Management, said he intends to talk to corporate management teams about workplace policy and culture issues, including managing the risk arising from sexual misconduct. “If they throw a legal answer at me, I’m disappointed,” he says. “‘We have zero tolerance’ isn’t how to answer the question. This is about showing respect and being able to explain how management provides a caring, nurturing environment for their team.”

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CtW Investment Group, an advisor to union pension funds, has been particularly assertive in taking companies to task for corporate misbehavior. In a recent letter to 21st Century Fox, the firm asked the company to hire an outside expert to review in detail Fox’s existing human-capital-management practices; add more women to the board; and set a timeline for the resignation of its lead director. CtW cited “mounting” financial, regulatory, and reputational costs associated with the sexual harassment crisis at Fox News. Fox responded in a letter that it is “committed to maintaining a strong ethical culture and a diverse workplace that promotes racial and gender equality,” and detailed changes the company has made to deal with the crisis. A Fox spokesperson shared the letter with Barron’s.

CtW’s next target is Amazon.com (AMZN), whose studio chief, Price, resigned after a producer publicly accused him of sexual harassment. Amazon’s board “needs to address the absence of women in the executive ranks,” says CtW’s research director, Richard Clayton.

An Amazon spokesperson declined to comment on the record. Price hasn’t commented on the matter.

Clayton and his colleague Emma Bayes liken the cascade effect of recent harassment allegations to that of protesters whose demonstrations led to the fall of the Berlin Wall in the 1980s. “Because the police didn’t crack down, the size of the crowd protesting the wall increased dramatically over several days,” says Clayton. “The fear that the East German regime had relied on was undone. Similarly, women who feared losing their careers by reporting sexual harassment at work are now realizing they need not fear the consequences. There will be a critical mass of support and solidarity.”

SO FAR, HARASSMENT-RELATED issues haven’t been viewed by many companies as a risk factor, based on a search of 67,500 corporate filings recently conducted by Sentieo, the financial-research platform, at Barron’s request. Specifically, Sentieo searched regulatory filings for the terms “gender,” “harassment,” and “discrimination.” Gender was mentioned in the risk-factor section of only 166 10-K filings, the primary annual-reporting document for publicly traded companies since 2009. Mentions were spread evenly over this period.

In a wider search of 10-Ks and 10-Qs (quarterly regulatory filings), gender turned up 12,342 times—again, spread roughly evenly over multiple years. A further search of corporate filings for mentions of harassment and discrimination yielded broadly similar results. “This may well suggest that companies are making progress through HR and committees for diversity,” says Youssef Essaegh, a Sentieo analyst.

Alternatively, it could suggest that issues of gender-based discrimination and sexual harassment haven’t yet reached the board level, a supposition confirmed by a survey of 600 mostly women board members of public and private companies conducted this past summer by theBoardlist and Qualtrics. The survey found that 77% of boards hadn’t discussed accusations of sexually inappropriate behavior or sexism in the workplace, 88% hadn’t implemented a plan of action stemming from recent revelations in the media, and 83% hadn’t re-evaluated company risks related to sexual harassment or sexist behavior. Only 8% of boards had discussed the risks and rewards of a company culture that encourages drinking or partying at work, activities likely to lead to undesirable behavior of many sorts.

Sukhinder Singh Cassidy, a veteran tech executive and founder of theBoardlist, an online platform that connects tech companies with women board candidates, says she wasn’t surprised by the survey results, as public- and private-company boards historically haven’t had formal oversight of talent and culture. But she expects that to change. “We will start to see the formation of separate board committees dealing with these areas, or the folding in of these types of issues into existing committees, such as compensation and audit,” she predicts. “Talent and culture risk will be identified as another type of risk factor.”

WOMEN AREN’T THE ONLY VICTIMS of unwanted sexual attention or gender discrimination. Spacey, the actor, was accused of sexual misconduct by men. He said he didn’t recall the encounter referred to by his first accuser but apologized for what he said would have been inappropriate behavior.

Yahoo! , previously run by a woman, has been sued by two former male employees, alleging that they were fired unfairly and that managers manipulated performance evaluations to favor women. In court filings, Yahoo! denied the allegations. Yahoo!’s former internet business, now called Oath, is now a subsidiary of Verizon Communications (VZ). An Oath spokesperson said the company doesn’t comment on pending litigation.

Yet the majority of victims are women, and their underrepresentation in the workforce could be part of the problem. Nearly half the world population is female, according to World Bank data, but parity in the workplace is rare. Based on constituent companies in the MSCI World index, women accounted for an average of only 36% of the workforce in Europe and North America in the five years ended March 2016. At the executive level, they accounted for only 14%.

“If you have a gender-diverse culture, this kind of behavior would be less tolerated and probably less prevalent,” says Charlotte Laurent-Ottomane, executive director of the Thirty Percent Coalition, an organization working to place more women on boards.

For Natasha Lamb, a managing partner at Arjuna Capital, pay parity is a critical issue. “It is difficult to change what people think about sex, gender, and race,” she says. “We have taken the approach to play the numbers game. Numbers, you can change.”

In 2014, Arjuna, another ESG-oriented firm, began pushing technology companies to disclose the pay differential between male and female employees. It filed a shareholder proposal that year asking eBay (EBAY) to reveal information about company compensation and goals to reduce any gender pay gap, but only 8.5% of shareholders voted in favor at the 2015 annual meeting. The next year, a refiled proposal was approved by 51%.

Shortly before eBay’s 2015 annual meeting, Lamb says, Salesforce.com (CRM) announced that it was committed to 100% pay parity. Arjuna then withdrew proposals at a handful of other tech outfits, including Apple (AAPL) and Intel (INTC), after their managements agreed to report wages by gender.

This year, Lamb and her firm are pushing consumer-discretionary companies to disclose compensation. Starbucks (SBUX) and Nike (NKE) have already agreed to do so, she says. Arjuna is in talks with Costco (COST). The company wouldn’t comment.

Doing good at companies on gender-related issues might also mean doing well by investors. A more diverse workforce, and policies aimed at fostering and maintaining gender diversity, have been tied by some researchers to better investment performance.

Morgan Stanley’s studies across industry sectors have found that companies at which women are well-represented and that also have pay parity, diversity-oriented policies, and initiatives to foster work/life balance tend to deliver slightly higher investment returns, with lower volatility. Gender diversity, the firm’s analysts note, also aids productivity, customer satisfaction, talent retention, and risk management.

Based on Morgan Stanley’s research, the financial sector appears to have done best in diversifying its workforce by gender, with a 50/50 split between male and female employees. But parity isn’t found in its upper ranks. On average, women account for about 30% of managers, 15% of executives, and 20% of board members. This raises concerns about advancement of women in the sector, Morgan Stanley says, concluding that financial-service companies “appear to be missing an opportunity.”

MEASURING GENDER DIVERSITY on boards is a lot easier than getting a good read on corporate culture—one reason why investors have focused on board composition. But other indicators could be even more informative. “There is a good bit of research to suggest that companies that are well-managed and have positive morale and high satisfaction among employees outperform those where morale and satisfaction are low,” says Katherine Klein, a professor of management at the University of Pennsylvania’s Wharton School, although she disputes the idea that gender diversity in the upper ranks will produce better returns. “We also know that when people are harassed and subject to abusive supervision, they withdraw or retaliate, and there is more likelihood of turnover.”

At the moment, Klein says, it is hard for investors to glean a lot of information about the experience of employees within companies. But as investors begin to use artificial learning to mine information found on employee- and user-review websites, such as Glassdoor and Yelp , and in employee surveys—and pair that with information about employee benefits and open-door policies—they could learn a lot more.

Chances are they’ll learn that sexual harassment is even more widespread.

RESHMA KAPADIA contributed reporting for this story.

An earlier version of this story incorrectly described Calvert Funds’ position in Dollar General stock.

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