It was spring of 1998, and Peter Karmanos Jr. was sitting on top of the world. A fireplug of a man with a piercing gaze and iron handshake, the then-55-year-old co-founder, chairman, and chief executive of Compuware Corp. had built it into a $1.1 billion purveyor of computer software and services. Sales were soaring, earnings were fat, and Wall Street loved him.
Moreover, the hometown boy was revered around Detroit for his community involvement and philanthropy. Thanks to his 12% stake in Compuware--now worth $656 million--Karmanos had given millions to cancer research. And, realizing a lifetime dream, he even owned a National Hockey League team, the Carolina Hurricanes.
But things soon started to sour. On May 20, at Compuware's regularly scheduled quarterly meeting, the usually convivial Karmanos turned somber, according to several directors present. Karmanos sadly told his board members that one of the company's highest-ranking officers had complained he had sexually harassed her. Sheila McKinnon, the company's senior vice-president for human resources, the board was about to learn, had told other executives that Karmanos twice suggested she engage in an extramarital affair with him, that Karmanos allegedly rubbed her leg at a social event and on a company plane, and that he later turned hostile and abusive when she spurned his advances. "I don't know how to handle this," Karmanos said to the board, according to a later deposition. "I'm hurt, I'm upset, I'm confused, and I don't know what to do."
SHOCK AND DISBELIEF. It was an intensely awkward moment for the board, which includes Elizabeth A. Chappell, a former AT&T vice-president, former Connecticut Governor and U.S. Senator Lowell P. Weicker Jr., and G. Scott Romney, son of the former Michigan governor. Suddenly, they were confronted with perhaps the most difficult, sensitive problem a board can face. Worse, McKinnon, 52, was not only a member of Karmanos' inner business circle but also a close friend of his and his wife, Debra's.
Equally troubling, McKinnon claimed that another woman, Karmanos' former secretary, 36-year-old Troy Strong, was also sexually harassed by him. Chappell recalls the sense of disbelief and gravity that filled the room. "It is a very, very serious subject. I don't care if it's Pete Karmanos or God, we needed to get to the bottom of that," she says.
Yet it didn't take long for Compuware's directors to decide they knew enough. As the board sat silently, Karmanos turned the meeting over to the company's general counsel, Thomas Costello Jr., who presented an 18-page report from an outside investigator hired to look into the allegations. "Although no final conclusion can be reached at this point as to what was actually said between Karmanos and McKinnon when there were no witnesses, there is no independent support for McKinnon's claims," the report said.
INVITING LAWSUITS? Compuware's 11-member board--which is weighted heavily with insiders, the politically connected, Detroit area figures, and others whose companies have done business with the company--began to consider the report. But discussion quickly moved on to McKinnon's job performance. Within 90 minutes, the board reached a consensus to terminate Sheila McKinnon's employment. "We felt the company had no choice," says board member Romney. "We couldn't tolerate retaining a head of human resources who we believed was fabricating a story."
But by basing their decision to fire McKinnon on an investigation of the CEO overseen by his subordinates--and moving beyond the report and into a review of her performance--Compuware's directors appear to have erred badly. Indeed, by failing to take on responsibility for the investigation themselves, the board may have increased the company's vulnerability to lawsuits.
As with all allegations of sexual harassment, those lodged against a CEO can be virtually impossible to prove or disprove. Perceptions of what took place often differ widely. In the ensuing battle to prove who is telling the truth and who is lying, one key point is often overlooked: At base, sexual harassment is about power. And a CEO of a large corporation, by definition, holds enormous power, marshaling vast legal resources in any confrontation. That's why experts in employment law say it is crucial that when a CEO is accused of harassment, he or she must step back and hand over the matter to the board.
However, a close examination of court records and interviews with Compuware executives, the company's lawyers, and six of Compuware's seven independent directors reveals that both before and after the May 1998, board meeting, Karmanos, his top staff, and their outside investigator, Anthony J. Rusciano, set into motion a troubled investigation that raises as many questions as it answers.
For starters, Rusciano alternated between acting as Compuware's investigating attorney on the case and giving the company advice on how to defend against McKinnon's allegations. He and his firm also have a long-standing business relationship with the company. At least, those ties create the appearance of conflict of interest that is best avoided in such a sensitive case, according to Michael Duffy, former chairman of the Massachusetts Commission Against Discrimination and now a consultant on workplace issues. Moreover, company executives who report to Karmanos--including one cited by both women as a key witness--played a major role in conducting the investigation. Perhaps worst of all, Karmanos injected himself into the McKinnon investigation by talking about it with Strong.
NO REGRETS. General Counsel Costello defends the actions of the board and company. "You do what you think is right, and I think we did. I think our board trusts us; they trust Peter, I know," he says. "A lot of those folks have known me or known Peter for quite a while, and I think they knew we would do things the right way." Compuware's directors also stand by their performance. "I don't think it could have been handled better," says Romney. "If there had been any hint of any merit in this, we might have done something different; there just wasn't any scintilla of anything."
Yet far from putting an end to the matter, the board's decision set off a chain reaction of bad news. Within four days, McKinnon filed suit against Karmanos and the company alleging sexual harassment and retaliation. In the wake of the McKinnon case, Strong also left Compuware and filed her own suit against the company for "constructive discharge." In her suit, Strong alleged that Karmanos twice suggested "we need to take the afternoon off and fuss around at a hotel," and that he had touched her inappropriately. Strong's suit alleges that as a result of being dragged into the McKinnon case and forced to provide testimony that would put Karmanos in a negative light, her working conditions became intolerable.
In an interview and in court records, Karmanos denies all the allegations made by both McKinnon and Strong. Says Costello: "In any other business [McKinnon's allegations] would be called extortion." Compuware and Karmanos countersued McKinnon, charging defamation, but dropped the case roughly three months later. Explains Elizabeth H. Tipton, a Houston-based defense attorney hired by Compuware: "We didn't want to be perceived as a bully in front of a jury." The two sides agreed to an out-of-court settlement in April of this year and signed a "non-disparagement" clause. McKinnon declined to be interviewed. Unable to find a comparable job, Mc-Kinnon is now working as a consultant, says her attorney, Kathleen Bogas.
Strong's case is pending. She left the company in August last year and now works as a management trainee at a Detroit area retail store. "Nobody cares that my reputation is ruined. Everybody is concerned about Pete's," she says. "I do respect him as a businessman, but what he did isn't business."
Whatever really happened, the entire episode has been a bitter pill for Karmanos, 56, a proud man who has enjoyed a brilliant career. "You sit here, running a company for 26 years, and then this," he says in an interview. Karmanos has been the heartbeat of Compuware for as long as anyone can remember. Since pooling his income tax refund with two friends to raise $9,000 and start Compuware in 1973, he has put his personal stamp on every aspect of the computer services and software company.
Compuware makes its money helping big organizations, such as Ford Motor Co. and New York's Metropolitan Transit Authority, get their computer networks running smoothly. Under Karmanos, the company has posted 30% or higher annual growth in revenues and even higher profit growth in the past three years, earning it the No. 6 spot on the BUSINESS WEEK 50 list of top-performing companies this spring.
More than just a bottom-line guy, though, Karmanos has won plaudits for giving Compuware workers a state-of-the-art gym, day-care center, and gourmet cafeteria--making Compuware one of the most sought-after places to work in the Detroit area. The constantly gum-chewing Karmanos is by most accounts a popular CEO. The son of Greek immigrants who got his first taste of business as a kid waiting tables in the family diner, he prides himself on being a regular guy. Nor is he afraid to pepper his conversation with loud and profane remarks. And just two months ago, Detroit rejoiced when Karmanos promised to move Compuware's headquarters and 6,500 high-skill jobs from the company's lush suburban campus in Farmington Hills to a now-rubble-strewn lot in the heart of downtown.
There seemed no limit to what Karmanos could accomplish. But his life became immensely more complicated in April, 1998. That's when Denise Knobblock, Compuware's executive vice-president for human resources and administration, walked into Karmanos' office. A longtime colleague of McKinnon's, Knobblock had been promoted over McKinnon. "Sheila has been making allegations that you sexually harassed her," Knobblock told Karmanos, according to her deposition. Karmanos says: "The first thing I did was call my wife."
Karmanos says his wife burst into tears. A former top-performing saleswoman at Compuware who wed Karmanos in 1990, Debra had become good friends with Sheila since the two met through their husbands, boyhood classmates. The McKinnons were among a handful of couples invited to vacation every summer with the Karmanos family at a condominium on the New Jersey Shore. Back in Detroit, Debra and Sheila often socialized, attending the opera and dinner together and going on "girls-only weekends," according to company documents.
HE SAID, SHE SAID. At first, Karmanos says, "I sat there for the longest time trying to figure out what happened." But a couple of days later, he "decided to deal with it as a businessman." He summoned Costello and instructed him to find someone outside the company to do an independent investigation. With Karmanos' approval, Costello turned to Rusciano, chairman of the board at Plunkett & Cooney, a respected Detroit law firm that had represented Compuware in employment cases.
Rusciano says in his report that he "interviewed 26 individuals" over the next three weeks, including top executives at Compuware and friends of both Karmanos and McKinnon. According to the report, none of them backed up McKinnon's allegations. Some of those interviewed, in fact, contradicted McKinnon's claims. Friends at the Jersey Shore, for instance, told Rusciano they believed it was McKinnon who was pursuing Karmanos. Pamela Burt, a friend of both couples, told Rusciano that during the trip to the shore in August, 1997, McKinnon was "continually in [Karmanos'] face" and later, in a sworn deposition, she said McKinnon was "acting like a schoolgirl." But there was one very big problem. One of the 26 people Rusciano claimed to have interviewed, he spoke to for "less than a minute." The person was Troy Strong, Karmanos' former secretary, the one person who might have given credibility to Sheila McKinnon's claim.
Three weeks later, at the May 20 board meeting, Costello presented Rusciano's findings to the board as Karmanos sat uncharacteristically mute. In the course of their 90-minute discussion, the board soon turned its attention to questions prompted by the report about McKinnon's job performance. The report, for instance, said Karmanos was concerned that McKinnon "was not telling him the truth" about a study of pay differences between men and women employees done by consulting company William Mercer Inc. "In Pete's mind, lying about the Mercer study was a big deal," says Diane Prucino, Karmanos' personal attorney, in an interview. From there, the board moved into a wide-ranging discussion of her performance. Board member Elaine K. Didier, a former administrator at the University of Michigan, said senior executives told the board meeting that McKinnon had caused a "breakdown of trust."
Bogas, McKinnon's attorney, disputes that charge. "Sheila denies that she ever lied to Peter or ever misrepresented any findings of any study," she says.
That alleged breakdown was key to the decision to fire McKinnon, says Didier. Yet court documents show McKinnon had performed well since joining the company in 1992 and was respected for her accomplishments prior to the alleged incidents of sexual harassment. She was promoted to senior vice-president in 1996, becoming one of the highest-ranking women executives in the company. In a sworn deposition, Larry Fees, Compuware's vice-president for facilities, described McKinnon as an "energetic, witty, and charming" person who transformed the atmosphere in the human resources department from "cold and caustic" to "warm and inviting and friendly." Fees believes McKinnon was largely responsible for the creation of the fitness center, the day-care center, and the top-notch cafeteria, according to his deposition.
In interviews with BUSINESS WEEK, board members say another reason they agreed to terminate McKinnon was her failure, as the head of human resources, to follow company policy and lodge an official complaint about Karmanos' alleged behavior with her supervisor or the general counsel. Instead, McKinnon "was talking behind his back," says board member Didier. "That just tears down a management team," she says. But given the risks involved in making a formal complaint against a CEO, sexual harassment experts say that it would make sense for McKinnon to discuss her experience informally with a few trusted confidants. "You don't have to be a brain surgeon to figure out why she didn't go public with it," says Susan L. Webb, president of Pacific Resources Development Group Inc., a Seattle consulting firm.
SHORT SKIRTS. Had the board heard the full extent of Strong's allegations, they may have viewed McKinnon's allegations in a different light. Strong's alleged troubles with Karmanos began shortly before Christmas, 1996, she says. That's when Karmanos allegedly suggested to her that they go to a hotel. She says that she ignored the proposition, but that Karmanos repeated it about a week later. In an interview and in her complaint, Strong alleges that Karmanos made other offensive remarks, such as, "Could your pants be any tighter?" and "I want to see you bend over." He also allegedly hiked up Strong's skirt while she was sitting at her desk and grabbed her buttocks at a Compuware Christmas party. Karmanos denies these allegations in an interview and in a court deposition. He says he once had to tell her that her skirt was too short and too tight for work.
Karmanos characterizes the relationship between Strong and himself much differently. He says they simply had a personality conflict and didn't work well together. "It was awful," he says. "In 20 years, it was the first time in my career that I couldn't get along with somebody." Strong disagrees. "We got along fine until he propositioned me," she says.
Strong, who says she wanted to avoid going public with her allegations, transferred to another department in September, 1997. In making that move, however, Strong says she confided her problem to Denise Knobblock. According to McKinnon's lawsuit, Knobblock, in turn, told McKinnon about Strong's allegations. But when McKinnon cited Strong's charges to back up her own claims of sexual harassment in April, 1998, Strong told BUSINESS WEEK, Knobblock summoned her to a meeting and discouraged her from cooperating with McKinnon. In a deposition, Knobblock says she doesn't recall giving Strong that advice.
Then, on Apr. 29, Rusciano dispatched Knobblock to the company cafeteria to meet with Strong, according to Rusciano's deposition. But Strong refused to answer questions, saying she needed to speak with a lawyer first. In his deposition, Rusciano says: "The message I kept getting back from Ms. Knobblock and Mr. Costello was that she just didn't want to get involved."
Then on May 1, the final day of Rusciano's investigation, came a much-disputed meeting between Strong and Karmanos. Karmanos called her into his office, and according to Strong's deposition, he said: "You've got to talk to the lawyer. You've got to tell him that the reason why you left was we had a personality conflict and we just didn't get along; that I didn't sexually harass you."
Crying and upset, Strong says in her deposition, she went back to her cubicle, and the phone rang almost immediately. It was Karmanos, saying he had Rusciano with him, and Rusciano wanted to talk with her. Then, says Strong, "Tony got on the phone, and said, `Hi, I was just talking to Pete. He told me you want to tell me that you were never sexually harassed and that the reason why you left was because you had a personality conflict. Is that correct?"'
Karmanos' account of the May 1 meeting is different. "I didn't coach her on what to say in any way, shape, or form," he says angrily. Karmanos says he called Strong to his office "to find out what was going on, because she wasn't getting back to Tony." Rusciano says he viewed the joint phone call simply as an opportunity to reach Strong: "I didn't want her to be told what to say."
BAD MOVE. Experts, however, insist that Karmanos seriously erred. "Whether he said those things or not, he shouldn't be calling her into his office," says Richard H. Koppes, an attorney at Jones, Day, Reavis, & Pogue and a teacher of corporate governance at Stanford University School of Law. Even Compuware attorneys concede it was a bad move. Says Tipton: "Do I wish that meeting hadn't taken place? Of course." But she insists Karmanos never tried to influence Strong's testimony.
In any case, Strong said she couldn't talk to Rusciano at work and asked him to call her at home that evening. Although he says he tried to reach her three times to ask her about Karmanos' alleged harassment, he never reached her. That ended Rusciano's efforts to contact Strong. On Monday, May 4, Strong received a message from Knobblock saying that the investigation was complete and Strong's participation wasn't needed. Strong says at first she was relieved. "I thought Sheila had changed her mind." Instead, Rusciano concluded in his report, based on what Knobblock told him, that "Strong denied any such behavior by Karmanos toward her." Strong not only disputes that, she says Knobblock was the person she first told of her allegations.
It wasn't until July, 1998, that Strong finally told her story to Rusciano, even though his firm was by now representing Compuware in the McKinnon lawsuit. Although he was not the attorney of record on the case, Rusciano was providing advice on how to defend the case. But Rusciano and Costello insist that in interviewing Strong, Rusciano was again acting in his capacity as independent investigator. Strong, by this time on medical leave, quit a few weeks later and filed a suit against the company.
Over the next several weeks, Rusciano continued to advise Compuware on the McKinnon case. But by mid-August, Rusciano was back to wearing his investigator's hat, this time performing a second probe for the board into Strong's allegations. His conclusion: "I find no evidence to independently support or corroborate any of Ms. Strong's harassment or retaliation claims."
It's unclear whether Compuware's board of directors would have reached a different conclusion in the McKinnon case if they had known earlier about the extent of Strong's allegations. But board member Chappell says she had no second thoughts after his report. "I know I should say yes, but I didn't. I still believed there was nothing to this."
There may have been other questionable signs worth a closer look. In McKinnon's diary of events surrounding the period of the alleged sexual harassment, she refers to a conversation, dated "1-27-98," in which Knobblock informed McKinnon of Strong's own allegations of sexual harassment. Four days later, according to the diary, part of the court record, Knobblock told McKinnon that some syringes containing an impotency drug were found in Karmanos' trash.
In an interview, Karmanos confirms that he had brought "some pre-Viagra stuff" into his office from home. But he maintains that the syringes were unopened and in their original package and that he brought them to work in order to renew an expired prescription. He then says he threw the drug and syringes into the trash. Knobblock, who declined comment, concurred with Karmanos' version in her deposition.
Could Compuware's legal mess have been avoided had the directors taken charge of the investigation from the start? Costello says the Equal Employment Opportunity Commission guidelines emphasize handling sexual harassment allegations quickly, and that was why management did an investigation ahead of the board meeting. "If we wanted something absolutely bulletproof, yeah, it would be a great idea to have a separate committee, and not have the inside directors there. But there were time constraints. We had a board meeting coming up."
But was speed really the priority? There is a lesson for every public company in how the Compuware management and board handled the allegations, experts say. "The question is, who's the client here? The client is not the CEO. It's the company, the board," says Jones Day's Koppes. It is a lesson Pete Karmanos and his hugely successful Compuware have had to learn the hard way.