CEOs, like everyone, have private lives, and like everyone else, their private lives are their business. Except of course when issues concerning their the private lives arise and spill into their roles as CEOs. In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, takes a look at the way in which CEOs’ private lives can become relevant to issues of potential D&O liability. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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The recent firing of Kohl’s CEO spotlights corporate executive personal relationships and potential D&O insurance exposure. Whether the failure of company leadership and its board to uncover or acknowledge a relationship that included financial benefits may lead to shareholder and regulatory queries. As readers of the D&O Diary know, if not disclosed, salacious personal relationships have led to SEC investigations, Derivative or Securities Class actions against a company or board.
In the wake of workplace “Me Too” and public cheating scandals involving colleagues, a preexisting romantic relationship that was allegedly an “open secret” remained undisclosed and a surprise to board members. Even so, the existence of the relationship, even one that may violate a company’s code of conduct, may not, alone, form the basis of a shareholder demand or securities class action.
Yes, there have been cases where an executive’s personal relationship has led to investigations uncovering facts and circumstances alleged in various regulatory investigations and lawsuits. For example, a follow-on securities lawsuit was filed against Barclays after revelations of the alleged personal relationship between its former CEO, James “Jes” Staley, and Jeffrey Epstein. A brief background on the Staley allegations and Barclays’ response follows.
In 2019, Staley was reconfirmed as Barclay’s CEO even after the U.K Financial Conduct Authority (“FCA”) initiated an investigation into Staley’s relationship with Epstein. Staley had purportedly given the Barclays board an “explanation” of his relationship with Epstein, which was reviewed by outside counsel and determined to be professional. In November 2021, Barclays received the investigation findings from the FCA, and a Financial Times article came out with evidence that Staley and Epstein were regularly communicating during the time of Epstein’s alleged sex crimes. Staley stepped down around the same time.
In 2023, Staley was named individually as a third-party defendant in the Epstein sex trafficking victims’ civil case against various parties. A securities class action was filed against Barclays, alleging, in part, that Barclays knowingly misrepresented the relationship between Staley and Epstein and violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Notably, the years-long personal relationship between Staley and Epstein also included allegations of suspected criminal activity.
Kohl’s may consider the steps Barclays took as proof of Staley and Epstein’s personal relationship began to emerge, as the press reports more information about Kohl’s former CEO’s romantic relationship. The Wall Street Journal (WSJ) reported that Kohl’s terminated its CEO, Ashley Buchanan, after an outside law firm investigation uncovered his romantic relationship with a coffee vendor CEO, who was also a member of a Boston Consulting Group (BCG) team engaged on Kohl’s behalf by Buchanan. The external investigation began after concerns were raised about Buchanan directing Kohl’s to enter into “highly unusual” contracts with the coffee vendor and BCG that included “favorable terms.” Buchanan admitted to the relationship when confronted and was fired for cause. Kohl’s stock price rose on the news of his firing.
Buchanan had not disclosed his romantic relationship or any potential conflict of interest with the coffee vendor or BCG in violation of Kohl’s code of conduct. According to WSJ, Buchanan’s romantic relationship was an “open secret.” Many current and former colleagues allegedly knew about the relationship, which had been acknowledged during both parties’ 2020 divorce proceedings, and the two lived together in Texas. A sales agreement was also entered into between the coffee vendor and Buchanan’s former employer during his tenure.
None of the facts reported to date involve criminal allegations. There was, however, an alleged failure on Buchanan’s part to disclose his relationship or conflict of interest, which allegedly violates Kohl’s code of conduct. The Board was also “surprised” by the romantic relationship. Whether an executive’s failure to disclose a personal relationship could even potentially lead to a D&O claim depends on the underlying facts and legal pleading standards.
A securities class action stemming solely from a CEO’s failure to disclose a conflict likely would face legal hurdles, in particular, proving the CEO’s violation of the company code of conduct was material and caused shareholder loss. Pleading standards and legal precedent are helpful to D&O insurers wondering how much personal information about a CEO is enough or too much. Among the hurdles that such a claim would face is that the plaintiff would have to show that the failure to disclose a personal relationship was material or misleading.
For example, the Ninth Circuit Appellate Court affirmed the Northern District of California’s dismissal of a complaint asserting securities fraud claims based on the CEO’s violation of the corporate code of conduct. The court further held that the failure to disclose material facts, namely concerning the CEO’s noncompliance with the code of conduct, was not factually misleading to shareholders. Often, to be actionable, a securities case will need to include allegations of material facts to allege breach of fiduciary duties, such as misuse of corporate assets for personal purposes.
There are other hurdles that a claim based on these kinds of allegations might face, in particular, loss causation is required in order to prove damages in a securities fraud case. Loss causation is established by demonstrating a causal connection between the CEO’s conduct and shareholders’ economic loss. A CEO’s personal or romantic relationship with a vendor or consultant, or the CEO’s failure to disclose a relationship, may not necessarily cause damage to shareholders.
What may happen after a very public outing of a personal relationship and failures by the executive to disclose a potential conflict of interest is a shareholder derivative demand. Shareholders typically need to make a demand first on the board of directors to address the alleged wrongdoings, before filing a derivative lawsuit based on the response to shareholder demands. The board’s explanations in its response regarding actions taken relative to a CEO’s personal relationship may determine whether a follow-on lawsuit demanding additional actions by the board is filed.
Finally, as we have discussed on the D&O Diary, per Caremark and its progeny, public boards must monitor and oversee the company’s operations and management to ensure that the company is acting lawfully, ethically, and in the best interests of shareholders and stakeholders. This includes oversight over the CEO and upholding a code of conduct that prohibits self-dealing. Buchanan was identified, vetted, hired, and, at some point, approved to be the CEO of Kohl’s by the board.
Whether additional facts surface regarding his romantic relationship and impact on Kohl’s during his 100-day tenure remains to be seen. In the meantime, D&O insurance underwriters should be aware of the potential liability that could arise when office gossip involving a public company CEO turns out to be true.
The views expressed on this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with her company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.