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Can a morals clause prevent executives from harming your company?

On Behalf of | Jan 30, 2023 | Business Litigation |

You’ve worked hard to build your business and are proud of its success and reputation. If you’re bringing a new partner or other executives into the business, you count on them to represent it well and reflect the values you represent.

As we’ve all seen in recent years, one tweet, online post or interview by a CEO can send stocks plummeting. One cellphone video of an executive saying or doing something unfortunate can lead to worldwide calls for boycotts. All of this can happen within hours. No matter how well you know – or think you know – someone you bring into the company, you can never know how they might behave in their worst moments.

Do you have a right to hold those who represent your company accountable for their actions outside of work if they can damage the company’s reputation and/or its bottom line? You can include what’s often called a ‘morals clause” in their partnership agreement or another contract they sign when they come on board.

Drafting a morals clause

A morals clause needs to be clear but not so burdensome that the person who signs it feels restricted from going about their life. That’s assuming that life doesn’t involve illegal activity or membership in an organization that most of your customers would find reprehensible. Some morals clauses state what kinds of behavior are considered a violation. Others are as simple as prohibiting anything that causes financial harm to the company.

A morals clause needs to spell out potential consequences for violating it. These typically include immediate termination without any kind of severance. It may be possible to specify that you have the right to seek back pay or other compensatory damages. While people have a right to negotiate the terms of any contract, including a morals clause, before they sign it, it’s crucial to be sure that you use and enforce them consistently.

It’s always wise to have experienced legal guidance when you’re drafting, negotiating and enforcing your contracts. This can help you ensure that they serve the purpose you intend and support your business rather than cost you time and money.