Security Staff Acquisition & Development

Small Business Workplace Behavior: What CEOs Must Monitor


A little over a year ago, I represented Paul who was selling his business to a strategic buyer from the west coast. His company had 47 employees, was 27 years old, and very profitable. Paul’s company served the food processing industry. The transaction process was going smoothly. The buyer was paying a significant premium for his business and Paul was on top of the world.

Author: Gary Miller
Author: Gary Miller

About two and half weeks before the closing of the transaction, Paul received notice that he, his company, and Roger, VP of sales, were being sued for sexual harassment. The complaint alleged that Roger, three years earlier, had begun sexually harassing one of his subordinates (Megan) at a sales meeting in Dallas. The complaint further alleged that, despite Megan’s rebuke of each of Roger’s advances, the harassment continued for the following two years, creating a hostile work environment for Megan. She finally left the company, without explanation, a year before it was put up for sale.

Paul was blindsided. He had no idea that Roger had been harassing Megan. However, Paul had been puzzled and disappointed when Megan, a rising star in the company, had resigned so suddenly.

Paul immediately contacted me and his law firm to explain the situation. We all agreed that Paul had to disclose the lawsuit to the buyer, since the lawsuit, now, was a potential liability to the buyer in the future. The closing was postponed until the buyer could decide whether to go through with the transaction. In the end, the buyer walked away.

Paul was now left with a company that would have to defend him and his company in a lawsuit, potentially dismiss his VP of sales, and start all over to find another buyer after the lawsuit was settled.

The subject of sexual misconduct in the work place is dominating mainstream conversations and board room agendas. This crime doesn’t just plague men and women who run large global enterprises, Fortune 500 behemoths, film studios, and media platforms. Small businesses, though not as newsworthy, are experiencing similar situations.

In the U.S., 43 percent of employees work in organizations with 50 or fewer people. It would be a mistake to think that a smaller workforce means a decreased chance of sexual harassment. In fact, a few characteristics make small firms more susceptible. For example, at a smaller firm, people may interact more frequently, and that proximity can provide repeated opportunities for harassment.

Also, many small firms, especially those with fewer than 30 people, do not have formal HR departments. The absence of HR means that CEOs must take more responsibility to keep current and design, communicate, and monitor rules regarding workplace behavior. Another challenge is that without an HR department, more incidents might go unreported, as in Paul’s company.

Aureus Asset Management studied 57 CEOs from small businesses. The majority (70 percent) said they are more worried now about sexual harassment affecting their employees and their businesses than they were a year ago. They attributed this heightened anxiety to high-profile cases and reverberations, coming to light, rather than on any specific incident within their companies.

They worried, and rightly so, that the existence of inappropriate behavior, lurking in the shadows, would damage their office culture leading to poor morale and productivity.

They realized that they must produce a clearly written harassment policy to protect both employees and the firm’s reputation. Twenty of the CEOs acknowledged that they too, are more aware of their own behavior today than in the past.

Small businesses do not actually need an HR department to root out and prevent sexual harassment if management is educated about the topic and:

  1. Looks for factors that lead to a toxic culture, such as having a predominantly male executive staff in power and being indifferent to allegations;
  2. Establishes clear policies (in writing) outlining what constitutes sexual harassment, which behaviors will not be tolerated, and what employees should do if they see or experience misconduct;
  3. Looks for potential signs of misbehavior such as: a. Touching others frequently; b. Women quitting more frequently than men; c. Telling inappropriate jokes continuously; and, d. Drinking too much at company events.
  4. Asks the alleged accused to take a leave of absence until the owner investigates the entire situation and seeks to resolve the problem internally. If seeking resolution internally is impossible, the owner should seek outside counsel.

Should the complaint be litigated, sexual harassment claims have two classifications:

  1. “Quid pro quo” harassment: for example, when a supervisor, or an employee in a position of power, demands sexual favors from a subordinate/worker either in exchange for a job benefit, like a promotion, a raise, or to avoid a job detriment, like getting fired or demoted.
  2. “Hostile work environment” harassment: for example, sexual conduct or behavior that interferes with an employee’s job performance or creates an intolerable work atmosphere. The offensive conduct, however, must be “pervasive” or common place.

For example, a single “dirty” joke told by a male worker at the water cooler probably doesn’t rise to the level of a hostile work environment. Telling such jokes around the office every day would.

Employers must investigate any sexual harassment claim brought to their attention. If an employee complains about sexual harassment by a co-worker or a supervisor, or even a customer, and management fails to investigate, the company can be liable under Title VII of the Civil Rights Act of 1964.

On the other hand, an employer is liable if one of the supervisors or managers takes adverse action against an employee, such as firing or refusing to promote the person because he or she refused the supervisor’s sexual advances.

How do you protect your employees and company?

The best thing is to have and follow a written sexual harassment policy, which should:

  • Define what constitutes sexual harassment, providing real-life examples;
  • Make clear that sexual harassment will not be tolerated in the work place;
  • State that all claims of harassment will be investigated;
  • Set forth an easy-to-use complaint procedure that designates at least two managers or supervisors to whom employees can address complaints as well as one person outside of management;
  • Require supervisors and managers to report any incidents of sexual harassment;
  • State the corrective or disciplinary measures to be taken for sexual harassment, up to and including discharging the harasser from his job.

Generally, a company will avoid liability under Title VII if it has and follows an anti- harassment policy. The policy must provide a complaint and investigation procedure, and the employee must take advantage of those procedures by following the established protocol. Not only does this protect employers who are dealing with harassment claims, it also discourages false claims from being waged.

Almost every CEO of a small company has concurrent goals to grow into a highly profitable business and to create a vibrant and desirable office environment. If a blind eye is turned toward sexual misconduct at work, high financial, reputational, and energy-sapping costs of dealing with a sexual harassment lawsuit will injure the company significantly.

Small businesses can prevent sexual harassment by establishing a healthy internal culture, which means listening, observing and encouraging an open, honest, dialogue among managers, supervisors and employees. The well-being of your employees, thus your company are at stake.

Paul is still fighting the lawsuit. Scores of thousands of dollars and hundreds of man hours have been spent in investigations, depositions, interrogatories, and attorney client meetings and conferences calls. All could have been avoided had Paul anticipated the potential for a sexual harassment situation.

Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.