By Foy, Norman F. | Strategic Finance, August 2000 | Go to article overview


Foy, Norman F., Strategic Finance

Sound management practices can minimize or eliminate this financial risk.

Sexual harassment may be the biggest single financial risk that exists in companies today. Some companies have learned this the hard way. Astra USA settled its sexual harassment case for $10 million, Baker & McKenzie--a titan of law firms--paid $7.1 million in damages, and Management Recruiters International paid $1.3 million. Add in typical six-figure tabs for lawyers, and it's obvious that the bottom line takes a big hit.

Because risk management often comes under the financial umbrella and sexual harassment cases are a risk to companies, it's critical that you deal with sexual harassment proactively. You can't afford to leave such a key area as the sole province of the corporate human resources group. The good news is that sound management practices and commonsense techniques can minimize--or even eliminate--this risk. I'll describe the risks, relevant federal legislation, and recent court rulings and provide you, the financial executive, with an action plan to minimize the threat of sexual harassment to your organization's bottom line.

First, a disclaimer. I'm not an attorney, so I don't intend to provide legal advice. But the information will help your organization avoid hiring an attorney to defend a sexual harassment suit. In these cases, the only winners are the lawyers. Case in point: While I was describing a case of sexual harassment at a presentation, an attorney said something like, "Now that's a case you may scare people with, but I could win that one in court!" My response? "Your use of the word 'win' is debatable. Sort of like, 'win a nuclear war.' Once you've reached the stage where a sexual harassment complaint is in court, the organization has already lost. The only issue is how much you've lost!"


It's been said that while most men aren't harassers, most harassers are men. With this in mind, is there a composite of a company most at risk? Organizations that appear most susceptible to breeding sexual harassment consist of older men in positions of power and younger women who have considerably less hierarchical power. Law firms, public accounting firms, the military, and the U.S. Congress are a few types of organizations that fit this profile.

Monetary losses aren't the only risks to companies. Sexual harassment claims impact at least three other areas: the handling of Statement of Accounting Standards No. 5, "Accounting for Contingencies"; your company's reputation; and the work environment. First, think of your responsibilities regarding contingencies that are outlined in SFAS 5. If the contingency is either probable or reasonably probable, you must record the estimate or discuss it in a financial statement note if you can't make an estimate. Only if the contingency is remote can you justify not mentioning the situation. Beginning a financial statement note with "the company is the subject of a sexual harassment suit..?" will only generate negative publicity.

The second area a sexual harassment case impacts is reputation. Estimates indicate that a crisis related to a company's reputation can decrease a publicly traded firm's market value from 5% to 30%. If you doubt the numbers, think of the adverse publicity generated about Mitsubishi in the late 1990s during and after a sexual harassment complaint filed by the Equal Employment Opportunity Commission (EEOC).

Third, and in my opinion the most serious impact of a sexual harassment claim, is the effect on the company's morale, productivity, and general work environment. While the investigators of a sexual harassment claim must protect the privacy of all concerned parties, the grapevine often overcomes those efforts. The rumors can poison the everyday work relationships within your organization.

A few of you might be saying, "It can't happen in my organization!" But take a moment and think of your response if your CEO told you that your firm had just been named in a sexual harassment complaint by the EEOC. …

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