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.