United States: Tips for Protecting Your Company Before a Scandal Strikes

Last Updated: February 21 2013
Article by Kenneth Rosenberg

In today's competitive economy, it is imperative for companies to build and maintain a positive reputation and image in the marketplace. To do so, companies spend millions of dollars each year on a variety of brand building activities to demonstrate to the public that they are honest and trustworthy and that their services and products are valuable and should be purchased.

However, history has shown that a company's expensive and time consuming efforts to build a positive reputation can be seriously damaged in an instant when a scandal involving a high level executive strikes, as an executive's misdeeds are often attributed to the company. Unfortunately, examples of high level executives engaging in inappropriate actions, whether on or off duty, are commonplace and cut across every industry and sector. Further, there is no indication that scandalous behavior will abate any time soon as shown by the numerous recent scandals involving illicit affairs, insider trading, fraudulent bookkeeping and overbilling practices and other scams. Complicating matters is that, even when the best monitoring systems and public relations response plans are in place, scandals are unpredictable and often come to light only after significant damage has been done.

To deal with this uncertainty, companies should perform thorough background checks before hiring an executive. In performing background checks, companies should not only check an individual's credit history but also should conduct a broader search of any public records regarding litigation and/or bankruptcy filings for the applicant's current and former employer. Such filings may have useful information regarding the executive's prior performance. While performing such searches companies must be careful to comply with the Fair Credit Reporting Act and any other state or local laws that address the use of driving records, criminal records, and/or credit histories etc. 1

A company also can promote good behavior by adding a "morals clause" to the executive's employment agreement. A traditional "morals clause" is a contractual provision that gives an employer the unilateral right to terminate the employment agreement or take punitive action against the employee in the event that the employee engages in reprehensible behavior or conduct that may negatively impact the company. These clauses are often a part of the "termination for cause" provisions in the executive's employment contract. For instance, the "for cause" termination language in an employment contract could provide that the executive will be subject to termination for: (1) engaging in activities or conduct injurious to the reputation of the company or its affiliates including, without limitation, engaging in immoral acts that become public information, (2) committing an act of dishonesty, including, but not limited to, misappropriation of funds or any property of the company, and (3) committing a misdemeanor involving an act of moral turpitude or a felony.

Additionally, a company can link its "morals clause" to the executive's deferred compensation package. In a nutshell, the executive's agreement can provide that if he/she violates the "morals clause" they forfeit all or a portion of the deferred compensation they would otherwise be entitled to in addition to whatever other legal action may be taken against them. Likewise, a company can require an executive to pay for the full cost of their own health insurance if they violate the "morals clause." Directly tying the executive's future compensation to good behavior is also a proven powerful incentive to act ethically and in accordance with the company's standards of conduct.

Similarly, the executive's employment agreement could explicitly provide that the company, in its sole discretion, can refuse to defend and hold the executive harmless and/or to indemnify the executive if it determines that he or she violated the company's code of conduct, ethics policy and/or "morals clause." Such a clause in an agreement may not be allowed in jurisdictions (such as California) that impose a statutory duty to indemnify. But where permitted, they should make executives think twice before engaging in inappropriate behavior since their own assets will be at risk if they step out of line.

Unless explicitly prohibited, courts should uphold the foregoing clauses where they are clear, specific and unambiguous and not unduly broad or vague based on the well-settled notion that individuals have the freedom to enter into contracts to order their own affairs. Restatement (Second) of Contracts ch. 8, introductory comment. (1981).

By adding a carefully drafted "moral clause" provisions to an executive's employment agreement, a company will not only be sending a clear message to the executive of what is expected of him or her but also be providing itself with the ability to limit the damage in the event a scandal strikes. Further, adding such a clause should reduce the likelihood that an executive will engage in misconduct while encouraging ethical and responsible behavior thereby protecting and enhancing the company's public image and reputation.

As with drafting any contract, there is substantial room for error. Hence, if questions arise when preparing an executive's employment agreement to incorporate a "morals clause" or otherwise, it is advisable to contact qualified counsel to have it reviewed to ensure the agreement will be enforceable when needed.


1 For instance, the City of Newark, recently passed Ordinance 12-1630 which provides that employers with more than 5 employees may not run criminal background checks until after a conditional offer of employment is made and may only run checks on those working in "sensitive" positions. In addition, California law (e.g. Civil Code §1785.20.5 and Labor Code § 1024.5) limits when and how employers may obtain credit reports on prospective employees.

Originally published January 2013


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Kenneth Rosenberg
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.