Does performance override character? Or do we want performance and character?
What if this person when confronted, justifies their behavior with “it’s the truth and I’m the only one with the guts to speak out”? What if this person is a top executive with political ties to the company President yet others below feel the pain?
What if this person is not an employee but a customer?
Is it following our "respect to people principle" by not addressing this person’s behavior?
We want performance and character. It is not respecting the person (and more importantly all the others that must suffer) to ignore their toxic behavior.
I must admit I do have sympathy for the "I'm the only one with the guts to speak out" claim. But that doesn't excuse bad behavior, speak out, but do in a non-toxic manner.
You have to confront and address toxic behavior. It isn't easy. People with power and also people with a history to getting results can get used to being able to do whatever they want. Some cultures that is normal.
It isn't ok in a lean culture. Bottom line. If the CEO accepts it they are deciding they don't want to be lean. They might want to adopt some lean tool (which can benefit even non-lean organizations). But allowing toxic behavior directly contradicts respect for people.
Related: People are Our Most Important Asset - Negativity - The Lazy Unreasonable Man