When is the right time to fall on your sword?

Whenever a company gets into public trouble, there is inevitably talk of whether “heads will roll” or a senior executive will “fall on their sword.” 

The recent Fonterra contamination scare has been no different, with Gary Romano, managing director of New Zealand Milk Products announcing his resignation last week.

The notion of “falling on your sword” is not uncommon.  In recent times, we have seen Kate Wilkinson resign from her role as Labour Minister following the release of the Royal Commission on the Pike River Coal Mine’s report. 

On a perhaps less public scale, Lululemon Athletica’s CEO, Christine Day, resigned from her role this year following a see-through yoga pants fiasco.  We have also seen Swimming New Zealand’s CEO, Mike Byrne, resign from his position following the release of a damning report into the organisation. 

In light of the above, the question arises as to when, if ever, is the right time to fall on your sword? And can you be pushed onto it?

In some instances, the resignation of a senior manager will be at their own initiative.  When something goes wrong, the ultimate responsibility inevitably lies with the head of the organisation. 

The media and the public do not respond well to failures being attributed to “systemic errors” or small errors from a number of people which culminated in a large scale problem.  Equally, the dismissal of a low-level employee, who was in all likelihood following instructions or was not aware of the scale of the consequences of their actions, may result in a PR backlash for the company. 

In such circumstances, the CEO or a senior manager within the organisation may accept that the best thing for the future of the company is for a senior manager to take responsibility for the problem and to offer their resignation as a means of addressing the problem and allowing the company to move on. 

Once someone has publicly accepted responsibility and suffered the consequences, the organisation is seen to be taking the issue seriously and can point to tangible changes having been made in response to the problem.  Accordingly, the media and the public are more likely to give the organisation a second chance and to accept statements that “things have changed” and it will not happen again.

However, not all organisations can count on a senior manager to step down gracefully.  Instead, they may stubbornly dig their heels in and refuse to ‘take one for the team’.  In such circumstances, what power does an organisation have to ‘force’ an employee to fall on their sword?

Where the senior employee concerned did not have direct involvement in the actions or inactions which led to the incident, an employer is likely to have difficulty in justifiably dismissing that employee.  In order for a dismissal decision to be justified, the employer must show that its actions in all the circumstances were what a fair and reasonable employer could have done. 

There are circumstances where a one-off act of ‘gross negligence’ by an employee may be sufficient to justify termination of the employment relationship on the grounds that the negligent act is so serious that it destroys that relationship of trust and confidence between employer and employee. 

In theory, it is possible that a failure to provide sufficient oversight or to instigate the policies and procedures necessary to have prevented the incident may constitute a sufficiently serious act of negligence by the senior manager.  However, in practice, it is likely to be difficult to establish a direct link between the failures of the senior manager and the occurrence of the incident, particularly if the company is not proposing to discipline the more junior employees involved. 

This then leaves open the options of “persuading” the senior manager to resign or entering into a negotiated settlement with the relevant senior manager. 

Persuading a resignation is a risky move on the part of the company as offering an employee the “resign or be dismissed” option can result in a successful claim of constructive dismissal on the employee’s part.  If the employee has already refused to resign of his or her own volition then it is reasonably likely that the employee would also object to being persuaded to resign.

The negotiated settlement option is a more costly, but legally safer alternative.  Normally, such negotiations are conducted on a ‘without prejudice’ basis and the results of any such negotiations (and the ensuing payments) are confidential, although, clearly for some companies and public sector entities, there may be additional disclosure obligations in respect of any payments made. 

In order for any settlement negotiations to be conducted on a ‘without prejudice’ basis, three key conditions must be met.  First, there must be a genuine factual dispute between the employee and the employer.  In these circumstances, the dispute may well relate to the degree of control or responsibility that the senior manager had for the incident. 

Secondly, any without prejudice communication ought to be made in a genuine attempt to compromise and settle the matter in dispute.  Finally, both parties must agree to conduct their negotiations on a without prejudice basis. 

Although this is an effective way to exit a senior manager from a legal perspective, the amounts involved will correlate directly with the degree of risk involved if the company were to dismiss the manager, the manager’s willingness to leave the organisation, the way that the parties have been portrayed in the media to date and the future employment prospects of the manager. 

Clearly this is an issue of risk analysis as the PR ramifications and the reaction of shareholders to the idea of paying a senior manager who should have just done the “right thing” and gone can outweigh the benefits of having a senior resignation as the public outcome of the incident.  This is particularly so where the payment amount will need to be disclosed.

In this regard, given the legal limitations in requiring senior managers to assume “vicarious liability” for the actions of their more junior employees, resolving a serious public incident by way of a senior management resignation is an option that does not come cheap.

Jennifer Mills is a patner and Christie Hall is a senior associate at law firm Minter Ellison Rudd Watts.