Allegations of CEO Misconduct Become Weapon in Fight for Control

(Bloomberg) -- Why was Steven Eror fired?

According to the board of directors at ProLung Inc., the small medical company Eror co-founded, he was a serial harasser, touching and spying on female employees. He also used company funds for personal expenses, they allege, adding up to behavior the directors have called “creepy, dangerous, and risky.”

Eror has a different story. The claims against him are baseless, the result of a “self-serving, sham investigation founded on baseless allegations” he said in an email, and he is fighting his ouster, urging investors to add eight new members to the board.

Fights over corporate control have never been pretty. Now allegations of bad behavior – sexual misconduct, racial intolerance, general bullying – are becoming new weapons in battles between investors, executives and directors at companies from little ProLung to behemoths like CBS Corp., Athenahealth Inc. and Papa John’s International Inc.

“We’re talking about things that we wouldn’t have talked about 10, 15, 20 years ago in the boardroom,” said Davia Temin, founder of crisis-consultant company Temin & Co., which keeps a daily tally of harassment and misconduct allegations. “We’ve gone from identifying all of the sexual harassment, to beginning to act upon it and root it out of our organizations. Now we’re turning it into a weapon in corporate control fights.”

More than 670 high-profile executives and employees have been accused of harassment or other wrongdoing in the last 21 months, according to the Temin & Co. tally. That includes about 67 founders; At least 26 of them ultimately left their firms, including CBS Corp. CEO Leslie Moonves, who stepped down last weekend.

Even without allegations of misconduct, proxy fights usually reveal deep divisions over company strategy and direction. Amid the allegations of Eror’s personal misconduct at ProLung, there is acrimony over what the board says is a botched plan to take the 15-person company public in 2017, according to an August 27 filing.

Not everyone agrees that Eror’s dismissal was fair. The board’s former chairman, Todd Morgan, said in a press release that the board was divided on the evidence against Eror, and that some board members had refused to allow Eror the chance to respond.

ProLung makes a device designed to assist doctors in diagnosing lung issues. The product is not yet available in the U.S., but ProLung has an appointment with the Food and Drug Administration to discuss a study of the technology. The ProLung Board last month wrote a letter to investors urging them to move on, saying Eror’s return could “disrupt our progress and jeopardize our FDA submission.”

For his part, Eror said his primary focus is “restoring order” by electing his slate of directors.

At CBS, sexual harassment claims against 68-year-old CEO Moonves added ammunition in an already-pitched battle with controlling shareholder National Amusements Inc., or NAI. The company announced Moonves’s departure Sunday after the New Yorker reported new allegations of harassment.

At the same time, the board ended a separate legal fight with NAI, which is controlled by Sumner Redstone and his daughter Shari Redstone, and announced that six board members will be replaced, effectively ending years of conflict over the company’s direction.

Moonves, in a statement to the New Yorker, acknowledged three of the encounters, while maintaining that they were consensual. “The appalling accusations in this article are untrue,” the executive said, adding that he has “never used my position to hinder the advancement or careers of women.”

At Athenahealth, CEO and co-founder Jonathan Bush was in the midst of a takeover battle with activist investor Elliott Management Corp. when he was the subject of a series of allegations about past misconduct. Bush stepped down from the health-care technology company, in June, clearing the way for a potential sale of the $6 billion firm. His removal has increased the chance of a sale, according to stock analysts. The shares are up 16 percent since Elliott began pushing to acquire the company, though the stock has dropped since Bush announced his resignation.

Bush has acknowledged and apologized for punching his ex-wife more than a decade ago, and the former couple has said they have made amends. He has in the past declined to comment on other allegations that he behaved inappropriately with female employees, though in an article in the New Yorker last month, Bush described what he thought was a campaign by the activist fund to bring up incidents from his past as part of the battle for the company’s future. In the article, Elliott said that wasn’t the case.

One ousted executive has even tried to turn scrutiny of behavior on his overthrowers, while facing his own claims of misconduct.

Papa John’s founder and largest shareholder John Schnatter quit as CEO in December and recently resigned as chairman over his use of a racial slur on a work-related conference call, which he said was taken out of context.

He still sits on the company’s board, however, and has used his spot there to ask fellow directors for any information about allegations of sexual harassment or other misconduct by other directors. He’s also sued the board and the new CEO to “stop the irreparable harm” to the company that he says they’re causing.

Forbes in July reported on allegations that Schnatter himself spied on workers and engaged in sexually inappropriate conduct resulting in at least two confidential settlements -- claims that the magazine said Schnatter disputed through a representative.

©2018 Bloomberg L.P.