CEOs, Just Cause, and $$$$

With the Disney case and now Grasso grabbing headlines, disputes over large payouts to former corporate executives have garnered great attention of late. Last week, another such dispute boiled to the surface, this time in the form of an appeal from an arbitration award in favor of Robert J. O’Connell, the terminated former CEO of MassMutual Financial Group. Sample media accounts can be found here, here, and here.

According to these stories, MassMutual’s allegations of O’Connell’s wrongdoing included, among other things, having affairs with several female employees, making $23 million on questionable “shadow” stock trades, intervening to prevent disciplinary actions against family members who held senior positions, and buying a fancy company-owned condo at a below-market price. The arbitration panel found that MassMutual failed to prove some of these allegations, failed to adhere to procedures for termination set forth in O’Connell’s contract, and otherwise failed to demonstrate just cause as defined in that contract. The panel did find that the firm was entitled to a return of the $23 million. Nevertheless, it awarded O’Connell compensation under the agreement worth between $40 and $50 million. MassMutual is now seeking to overturn the award in a Massachusetts court.

Without more information, we can’t tell whether the arbitrators got it right or wrong, but let’s focus instead on the contract itself. Here is how one report described the substantive portion of the just cause provision:

According to O’Connell’s contract he signed in 1998 when he joined MassMutual, he could be fired for a criminal conviction, theft or embezzlement, as well as for “conduct that constitutes willful gross neglect or willful gross misconduct … resulting in material harm to the company.”

Assuming this description is accurate, the term smacks of board of director abandonment of core principles of corporate governance. While there are many just cause provisions in employment contracts that are not the least bit problematic, this is the CEO we are talking about, this is quite a just cause provision, and the compensation at stake is, well, large.


The CEO is the person the board of directors must rely on to run the business, and this kind of provision hamstrings the board’s ability to ensure the CEO does in fact do so faithfully and effectively. Under the terms of the contract, “mere” incompetence, uncooperativeness, or awful judgment are not enough to justify termination. A “mere” breach of fiduciary duty isn’t either. Same with sexual harassment. Indeed, “willful gross misconduct” isn’t enough unless the firm can prove resulting “material harm” to the company. Sure, the firm could still fire such an incompetent, uncooperative, duty-breaching, harassing, or wrongdoing CEO, but, in a context such as this one, only with a $40-50 million payout. This would put a chill in the air in almost every boardroom, and reinforce the reluctance of boards to admit publicly their mistakes in hiring a CEO by firing him. The outcome in this case may make things even chillier.

Call me old-fashioned, but a board’s agreeing to such a deal – imposing ex ante further constraints on its ability to engage in effective oversight – strikes me as, at minimum, a breach of the duty of care. I am fully aware the law may not be there, but it should be.

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4 Responses

  1. Can you elaborate as to why this should be a breach of the duty of care? The board did in fact overcome the “chill” and fire him. Are you suggesting that courts should second guess informed decisions by a board of directors concerning a CEO’s employment contract or that the board here was not adequately informed?

  2. Tim Glynn says:

    Hi Bill:

    Thanks for your question. First of all, it is true that the MassMutual board ultimately fired O’Connell, but it might have been slow to act or not pursued these matters aggressively earlier on because of the terms of the contract. And one can easily foresee other boards being completely deterred from acting (particularly after the outcome in this case). By the way, there was some discussion in the accounts of an earlier investigation, but, again, I do not have enough information to determine what actually occurred and when, or, downstream, whether the arbitration panel reached the right decision.

    As for my conclusion, yes, I am suggesting that it ought to be considered a breach of the duty of care for a board of directors – even one adequately informed as to the material provisions of the deal – to contract away its ability to engage in effective oversight of the CEO. For the reasons I discussed, I think the terms contained in this particular agreement (and the enhanced scope of freedom from board control they effectively give the CEO) cross that line. Again, I am not claiming current law necessarily supports this argument; I am suggesting that it ought to.

  3. Bev Shaw says:

    Is the text of the panel’s report available to the public? I would be interested in reading it.

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