Given the prevalence of reports of unethical behavior, some of it longstanding before the individuals in question are shown the door from their respective offices, it may not be a difficult leap to conclude that corporate misconduct is on the rise.
A more nuanced (or optimistic) view might be that companies and boards are investigating and acting with increasing transparency on whistleblower reports and allegations of misconduct.
Handling “Bad Actors”
Consider this past year at CBS as one example. The company’s former Chairman and CEO Leslie Moonves separated from CBS effective September 9, 2018, following accusations of sexual misconduct. The two parties had previously negotiated a $120 million exit package. In late 2018, the mass media company reported on the conclusion of its investigation of Moonves, CBS News and cultural issues at CBS.
The December 17, 2018, statement issued by the CBS Board of Directors read, in part, “With regard to Mr. Moonves, we have determined that there are grounds to terminate for cause, including his willful and material misfeasance, violation of Company policies and breach of his employment contract, as well as his willful failure to cooperate fully with the Company’s investigation. Mr. Moonves will not receive any severance payment from the Company.”
In January 2019, as reported in the company’s 8-K filing with the Securities and Exchange Commission (SEC), Moonves exercised his right to demand binding arbitration. Ultimately, although the former CEO’s total 2018 compensation amounted to more than $47 million, he received far less. CBS’s April 2019 Definitive Proxy Statement reported on exclusions, including $34,475,647 that related to “stock awards granted to Mr. Moonves in 2018 that were forfeited pursuant to the terms of his separation agreement with the Company.” That separation agreement also resulted in the forfeiture of Moonves’ 2015 and 2016 Performance Share Awards.
Moonves’ 2018 compensation settled out at an estimated $12.5 million, roughly 26% of the amount ostensibly on the table. It represented an even more dramatic decline from the more than $69 million in compensation that he had earned in each of 2016 and 2017 – let alone his $120 million exit package.
In December 2018, CBS made a commitment of $20 million in grants to be allocated to 18 organizations that focus on eliminating workplace sexual harassment. The grants were to be funded from deductions to the severance stipulated in the former CEO’s contract.
Additional Strategies for “Bad Actors”
In the auto sector, car owners in America, Canada and elsewhere continue to be impacted by Volkswagen’s “diesel dupe,” which resulted in car engines emitting pollutants reported to be as much as 40 times greater than the U.S.’ allowable limits. In September 2015, the U.S. Environmental Protection Agency (EPA) found that many of the car manufacturer’s diesel engine cars sold in the U.S. were equipped with software (defeat devices) that could detect when emission tests were underway, in order to alter performance and enhance test results.
The car manufacturer subsequently acknowledged having cheated on emissions testing and to having equipped millions of cars globally with the device. Volkswagen wasn’t alone in poor behavior. As of October 2018, total fines to the Volkswagen Group were projected at US$32.7 billion globally. Almost half a decade after the EPA flagged the deceit, ramifications continue to unfold. Martin Winterkorn, Volkswagen’s former CEO, not only lost his job, as did others, but German prosecutors announced in April 2019 that Winterkorn was one of five individuals charged in relation to the emissions scandal. Also charged with violating competition law and embezzlement, Winterkorn could be ordered to repay bonuses earned on the basis of sales.
While you and your organization want to avoid bad actors altogether, your board and its compensation committee can take pre-emptive measures by not waiting until they have to negotiate such a severance package.
Consider that, if the board or CEO is required to take action on poor performance, the bad actor’s severance pay will be only one of a number of issues requiring time, attention and cool heads. As a corporate secretary or governance professional, you’ll appreciate that bad actors’ performance (or lack thereof) can have a significant impact on employees and other stakeholders. Internally, a bad actor’s behavior has the potential to harm organizational culture – an understanding of which boards may be challenged by at the best of times – long before issues escalate to a point at which the board becomes involved.
Even with a good whistleblower program in place, it’s unlikely that failed performance or inappropriate conduct occur and are identified overnight. This suggests that the organization will also need to allocate and perhaps divert resources to repair damage that’s been done. When a bad actor has caused reputational and/or financial harm, the urgency and resource requirements are also critical.
Final Thoughts On Severance For “Bad Actors”
If your organization has its succession planning in good order, that will alleviate some pressures. However, even the best interim or acting CEO or other executive will have a learning curve and there may be ripple effects throughout the organization.
The board’s responsibility to shareholders, individual and institutional, is another obvious consideration. There have been so many documented instances of bad actors walking away in relative luxury that investors increasingly have an aversion to pay for bad behavior or failure.
Stakeholder and shareholder activism are logical considerations. It’s not unreasonable for these parties to expect that a board of directors will have anticipated and prepared for worst-case scenarios by pre-establishing severance packages, rather than having to negotiate them in the heat of the moment.
You may read this and consider it a theoretical exercise in preparedness, or an opportunity to be grateful that you and your board don’t have such issues. You may not envision (who does?) the possibility that your organization could ever be involved in a scenario in which a colleague wreaks havoc on the financial, cultural or reputational well-being of the organization, its employees and its shareholders. If that’s the case, it may help to consider raising discussion of pre-establishing severance pay agreements as one more form of risk management.
You and your board may also want to pay attention to external experts. Ryan Harvey, Partner at Meridian Compensation Partners LLC, speaks and writes on executive compensation developments and trends. On the topic of competitive recruitment packages, he’s noted this year that more than 66% of U.S. companies now provide severance to their senior executives as part of their recruitment packages. Harvey has also highlighted the merits of boards dealing with such matters within a nonemotional environment. Whatever internal and external expertise you and your board rely upon when it comes to compensation, and whether or not the board envisions itself having to deal with a bad actor, it’s worth approaching the concept of severance agreements as just one more governance responsibility.