"Without Cause" and Effect
Chief executive officers and other high-ranking executives are arguably quite a "protected class." For one thing, they're hardly ever fired "for cause," even when any realistic worldview would identify completely legitimate cause in many instances. Usually, such executives are simply allowed to resign or retire, entitling them to their massive golden-parachute goodbye packages regardless of what instigated the departure.
Today, investors were treated to a preciously rare moment in financial news: an outright firing of a major executive for cause.
Recent IPO and retailer Francesca's Holdings (NAS: FRAN) fired Chief Financial Officer Gene Morphis, who had gabbed a lot about company information using social media.
Forbes reported that Morphis had actually complained on Facebook about the audit committee and Sarbanes-Oxley rules, damning both Mr. Sarbanes and Mr. Oxley, in fact. As far as I know, there have been no reports about how many of his Facebook friends "liked" this. Worst of all, Reuters reported he'd tweeted about the company's results ahead of public announcement. That's a clear and major violation of Sarbanes-Oxley -- as well as a lapse in good judgment.
Francesca's Holdings shareholders should be gratified that the board just went ahead and did what most corporate boards fail to do: fire the offender for cause instead of allowing the individual to bow out disgracefully with a lucrative golden parachute. Corporate America tends to make too many excuses for unwise behavior, not to mention concrete violations of corporate policies and ethical considerations.
Along the same theme, let's rewind to the recent management shakeup at Best Buy (NYS: BBY) . Brian Dunn resigned in April. At first, this seemed to relate to Best Buy's ongoing anemic performance under Dunn. But it turned out that the resignation had more to do with a bit of a more personal problem -- Dunn had been having a relationship with a female employee.
Despite the fact that no misuse of company funds was found, this "personal" relationship actually did violate company policy. Today, Best Buy founder Richard Schulze has announced he's stepping down from the chairman position; he was aware that Dunn was having the relationship and even confronted him about it, yet he failed to tell the audit committee.
Back to the "for cause" and effect problem. The fact that Dunn resigned and wasn't fired outright for having violated company policy means he's entitled to a $6.6 million severance package. Given Best Buy's many competitive problems right now, long-suffering Best Buy shareholders shouldn't appreciate this kind of misuse of funds.
One heck of a lucrative walk of shame
This type of situation is hardly new. Remember when Mark Hurd left his post at Hewlett-Packard (NYS: HPQ) ? Corporate governance experts like Nell Minow took umbrage at how that situation was handled by Hewlett-Packard's bumbling board (this board, overall, has been a shocking repeat offender).
Most estimates put Hurd's severance package at anywhere from $30 million to $50 million, a shocking and offensive amount given the fact that the board should have crafted an employment agreement outlining specific ways in which the top dog could be fired for cause.
According to Minow at that time, "While most CEO contracts exempt poor performance as a reason for 'termination for cause,' there is no reason to permit a departure following an ethics violation to be characterized as a resignation -- when the result is a $50 million payout that would otherwise stay in the corporate bank account."
The New York Times' James Stewart pointed out that a major part of the problem in these situations is how narrowly "for cause" is often defined. Many times, it's simply defined as "conviction of a felony or a complete failure to perform material duties under contract."
Coming up with cause, ensuring reasonable effect
Every time a high-ranking executive fails big-time (including ethics violations and betrayal of investors' trust in management stewardship) and is allowed to simply resign, shareholder money is doled out to reward that injurious behavior. Shareholders should stop looking the other way when executives are rewarded in this manner, using millions in shareholder capital simply to bid a failed employee goodbye.
Most importantly, shareholders need to watch corporate boards, which are made up of the individuals who have been condoning this bad precedent. We must become increasingly aware of the ways in which directors too often shirk their duties, and vote 'em out if the problems persist.
Directors must remember the real reason they're there -- to look out for shareholder interests -- and stop rubber-stamping employment agreements that too rarely realistically outline reasonable "cause."
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Best Buy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.