Dismissing a CEO? Be prepared for the risk of litigation

When executives are dismissed, especially under contentious circumstances, there’s always a risk of litigation.

So says Jaime Hoopes, an employment lawyer at Roper Greyell in Vancouver, in discussing a recent case that should be of interest to senior HR leaders.

“You can’t stop somebody from suing, so all you can do is set up the best defense,” he says, in providing strategic lessons for HR leaders and boards, such as setting clear expectations, documenting thoroughly, investigating fairly, and ensuring that decisions are always grounded in the best interests of the organization. 

Claims of conspiracy, wrongful dismissal by CEO

The British Columbia Supreme Court decision puts a spotlight on the legal principles surrounding executive misconduct, the heightened duties of senior leaders, and how companies can protect themselves from claims of conspiracy and wrongful dismissal.  

The executive was the founder and CEO of Destiny Software Productions, a music promotion software company in Vancouver. He founded Destiny in 1991 and became the company’s president and CEO after it was purchased by what became Destiny Media in 1999. He also became the president and CEO of other companies later acquired by Destiny Media. 

In June 2017, Destiny’s three-person board suspended and terminated the executive after multiple instances of alleged misconduct, including encouraging and condoning another employee to perform work for an unrelated business during company time, failing to produce required business plans and timely press releases, prioritizing non-company matters over Destiny, and refusing to participate in an investigation into these issues despite clear instructions and warnings that not doing so would be insubordination. 

The executive alleged that his dismissal was part of a conspiracy to remove him from control of the Destiny Companies, that he was wrongfully dismissed without just cause, and that he was defamed by a public corporate filing regarding his suspension and termination. The company denied all allegations, asserting that the executive was terminated for cause due to performance and conduct issues. 

The court found the testimony of Destiny’s witnesses to be “straightforward, candid, and fair,” and consistent with the company’s records provided as evidence. In contrast, the court found the executive to be “an unreliable narrator,” with testimony described as “unsatisfactory and difficult,” and marked by evasion and inconsistency. The court preferred the evidence of the company’s witnesses — along with written memos, recorded opportunities for the CEO to comply, and a fair investigation — wherever it conflicted with that of the executive. 

High standard of conduct for executive 

The court found that the board acted in good faith and with just cause, and Destiny provided documentation of the misconduct and the company’s investigation. With documentation of the executive’s misconduct and no reliable rebuttal by the executive, the court found that the misconduct was serious and fundamentally breached his employment contract and fiduciary duty, rendering the employment relationship untenable.

It noted that “an employer is entitled to expect a higher standard of conduct from a senior employee who, for example, works with autonomy, is entrusted with discretion, or owes fiduciary duties as a result of the nature and degree of responsibility involved in their position.” 

The court also found that the decisions to suspend and terminate the executive were made by the board in the interests of the company and not with the intent to cause harm to the executive. There was no evidence of unlawful conduct in the board’s actions or procedures, said the court, noting that since Destiny had just cause for dismissal, the executive’s conspiracy allegation must fail. 

A significant aspect of the decision is its articulation of the contextual approach to just cause, especially at the executive level, according to Hoopes.

“The real focus is a contextual approach, so what the court is looking at is the nature and seriousness of the misconduct, the nature of the employment, what does the contract say, and what the policies are saying,” says Hoopes. “And then the expectation of the position — somebody who's an executive like a CEO has a higher obligation, and most will likely be considered a fiduciary.” 

Executive had fiduciary duty to company 

The contextual approach for just cause brought the court’s focus on the executive’s role, involving autonomy and being entrusted with the direction of the company, says Hoopes. 

“He’s the highest-ranking officer, so if he’s doing something that isn’t in the best interests of the company, that's an easy hook to start hanging the basis for just cause,” he says. “The first incident won't get you there, but the executive seemed to do a bunch of things that showed the company's interests weren’t the number one priority for him, which the court deemed fundamentally inconsistent with what a CEO is supposed to be doing.” 

The case also demonstrates the importance of thorough documentation and fair investigation, as the company’s ability to show a clear record of the CEO’s misconduct and their efforts to allow him to correct his behaviour were critical to their legal defence, says  Hoopes. 

“You need to document everything — for almost any employer, regardless of the employee, if there's misconduct or performance issues, it has to be documented,” he says. “If you're building up a case [for just-cause dismissal], you have to create the paper trail — there's nothing better than having a clear, consistent record of this.” 

Documentation with dismissals

The heightened circumstances make proper documentation even more important, he says. 

“You have to eliminate the tainted decision-making and that goes back to clear records of misconduct, fair and transparent investigation,” he says. “You have to convince the trier of fact that the sole motivation is the best interest of the company.” 

The conspiracy allegation was pretty much handled part and parcel with the wrongful dismissal allegation, says Hoope: "The board members genuinely appreciated that it was their fiduciary obligation to bring these issues forward.” 

Progressive discipline not always necessary, but it helps 

While progressive discipline is often the appropriate route for misconduct, the court recognized that in some executive cases, immediate action may be necessary due to the high stakes and risk to the company. Still, evidence that Destiny gave the executive a chance to correct his behaviour helped its cause, according to Hoopes. 

“If you can show that you gave a person a reasonable opportunity to comply, you took measures to get the person to help themselves and they failed to do that, that's always good evidence to have in your back pocket,” he says. “It makes further misconduct more likely to be an irreparable fracture of the employment relationship — the court said it didn’t think a warning was necessary, but it found the board members expressly articulated the need to comply with certain obligations and warned that a failure to cooperate would be treated as insubordination.” 

“There are business situations where you just need somebody to go and you don't have time to take those steps, but it's on a case-by-case basis,” adds Hoopes. 

Hoopes sees some strategic lessons for HR leaders and boards from this decision — set clear expectations, document thoroughly, investigate fairly, and ensure that decisions are always grounded in the best interests of the organization. 

“Focusing on the duties and responsibilities that this executive owed and comparing that to the misconduct is going to give you a good hint at whether it's irreparably fractured the core of the employment relationship,” he says. “If the individual is caught for possession of drugs or something like that, that doesn't necessarily speak to core conditions, but going against the board's directives and doing things not in the best interest of the company, those are fundamental to the position.”