WILMINGTON, Del./NEW YORK (Reuters) - The IMF now faces a challenge that keeps members of corporate compensation committees up at night: explaining why they may have to pay a handsome severance package to an indicted executive.
Companies have worked hard in recent years to avoid such a situation by rewriting employment agreements to deny a “golden parachute” to disgraced executives.
Former International Monetary Fund managing director Dominique Strauss-Kahn, facing charges of attempted rape in New York, resigned his post from the global lender on Wednesday.
Strauss-Kahn’s contract entitles him to a one-time severance payment of $250,000, the IMF said on Friday.
Strauss-Kahn has denied the charges and vowed to prove his innocence.
“Assuming he’s guilty, this would be every company’s nightmare — to pay severance to someone who’s a felon,” said Alan Johnson, managing director of compensation consulting firm Johnson Associates.
Many companies can deny severance payments to any executive fired “for cause,” which generally means breaching a company’s code of ethics or a criminal conviction.
However, having such a provision and enforcing it are different matters altogether, and fallen executives often negotiate their departure in private rather than exposing the issue to the public scrutiny of a court fight.
Mark Hurd, for example, resigned as CEO of Hewlett-Packard Co after the board found that he filed inaccurate expense reports involving a female contractor.
If the board had taken on the fight and terminated him, they might have saved the millions of dollars he received in a severance package — provided they prevailed.
The case of Tyco International Ltd’s disgraced former CEO Dennis Kozlowski, who is in prison for looting the company, shows how hard it is to fire someone “for cause.”
The company could not invoke that clause unless Kozlowski was convicted of a felony that was materially damaging to the company, according to Institutional Shareholder Service, a group that advises big investors. In addition, three quarters of the directors had to vote for it, ISS said.
Kozlowski resigned and the clause was not invoked at the time. If an executive is terminated for personal, non-work- related actions, the board has to decide how much of a threat the executive’s behavior poses to the organization.
“It becomes a gray area,” said David DeBoskey, an assistant professor and compensation expert at San Diego State University.
Executive compensation contracts usually have a moral turpitude clause that could void the contract for illegal conduct, but that typically applies only to conduct on the job, he said.
For conduct off the job, the board of directors would have to prove the employee’s actions damaged the company. Courts apply strict readings of contracts, which might mean the board ends up being obligated to pay the severance, he said.
“It could become a legal battle,” DeBoskey said.
As a result, scandalized executives tend to negotiate their resignations.
Not long after Harry Stonecipher was brought back to lead Boeing Co out of a series of ethical scandals, he was caught having an affair with a subordinate.
Rather than face termination, he resigned and did not receive any special severance.
In part, “for cause” provisions are a response to the corporate scandals around the turn of the century involving companies such as Enron Corp, WorldCom Inc and Adelphia Communications.
Before then, many companies did not think about for-cause provisions, said compensation consultant Johnson.
“At least in U.S. industry, the number of these kinds of outrageous situations has been very small,” he said.