Shareholders of the World, Unite!

In light of the big severance contract Hewlett-Packard (NYSE: HPQ  ) handed to CEO Mark Hurd after his alleged ethical lapses and expense-account padding, it's a worthwhile exercise for investors to ask whether boards of directors are doing their job of looking out for shareholders.

Maybe in most instances they are carrying out their fiduciary responsibilities as careful stewards, but in too many cases they seem to be merely looking out for their fellow executives. After all, many board members run other companies with their own boards, and if they start bucking the chummy camaraderie, they just might find their own compensation and benefits challenged.

Poked with soft cushions
Executive employment agreements typically spell out, exactly, under what conditions compensation, bonuses, benefits, perks, and severance packages will be awarded. But too often, all that seems to go out the window and new agreements are written so that golden parachutes with platinum ripcords and palladium-lined crash helmets are handed out. It's more like the Monty Python skit where they're tortured with the comfy chair.

Hurd isn't the only executive to get a sweet deal upon exiting and leaving his company a shambles. Countrywide Financial CEO Angelo Mozilo reportedly got $115 million in severance despite his role in the mortgage lender's downfall and the subprime mortgage debacle, although he did give up $38 million worth of the package. And American International Group (NYSE: AIG  ) paid $47 million in severance to its chief executive after the insurer crashed and burned, taking a bundle of taxpayer cash for its troubles.

In the wake of the Enron scandal, it was revealed that Duke Energy (NYSE: DUK  ) made a series of "round-trip" trades that inflated revenues and volume. In the uproar that followed, the board rewarded its outgoing CEO with a $4.8 million severance package. KB Home's (NYSE: KBH  ) former CEO became embroiled in a stock options backdating scandal where the board found he selected grant dates most advantageous to scoring a big return. When he resigned, the board still felt obligated to give him $175 million in severance, pension benefits, and stock options.

Sayanora, see ya tomorra!
In a situation reminiscent of Hurd's, Boeing (NYSE: BA  ) CEO Harry Stonecipher resigned after being caught in a compromising situation, and the plane maker's board was similarly generous, allowing him to remain on the payroll collecting his annual salary for an additional six months, giving him a $2.1 million incentive bonus, and allowing him free use of the company car and corporate jet.

Several years ago, Pegasystems' (Nasdaq: PEGA  ) president abruptly resigned just before a poor earnings report. Since he voluntarily left, he should've given up his perks, but the board instead wrote a new agreement to give him full benefits as "if he were terminated without cause or resigned for good reason." The cost to shareholders? $325,000 cash, options worth about $4.5 million, an undisclosed "bonus," and full salary and benefits for a year. 

Sometimes there's no scandal associated with a departure, at least none publicly disclosed, but you're left scratching your head anyway. Recently, Molina Healthcare's (NYSE: MOH  ) general counsel was abruptly "terminated without cause" after 12 years on the job, but still given $750,000 in severance pay, a prorated bonus of $145,000, and a few other perks. Investors can rightly wonder what was behind the move.

Act like you care
In the years since Sarbanes-Oxley was passed, we were supposed to see a more careful accounting of shareholder money. Maybe we've seen a few more "material deficiency" notices included in filings, but has it really resulted in better stewardship by the boards?

There's a three-legged stool here and each leg is wobbly. Executives are not performing up to expectations; boards are rewarding management for misfeasance, malfeasance, and nonfeasance; and shareholders are shirking their duties when it comes time for proxy voting.

Our boards are broken and they need fixing. We can do more than just rail about excessive pay and outrageous severance deals. Every year you get a chance to decide who sits on the board of directors, and if your company's board is broken, vote the bums out!

Editor's note: A previous version of this article incorrectly referred to the CEO of Pegasystems rather than the president. The Fool regrets the error.

Duke Energy is a Motley Fool Income Investor choice. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 17, 2010, at 7:47 AM, wrkdiver wrote:

    This cr@p has been going on for years!

    These arrogant Bah-Stahds all sit on each others boards and fly to expensive and exotic locations on the shareholders money to cosily pay each other off as one hand scratches the other, And since the largest shareholders are institutions who pay little or no attention to these shenanigans, they keep getting away with it.

    it's almost enough to sour you on Capitalism-except that the alternatives are worse!

  • Report this Comment On August 17, 2010, at 12:16 PM, jc09058 wrote:

    It is past time to re-evaluate the value of the Boards and those member that sit there. As an owner of the company, whether you have 1 share or 100 million shares, your interests are not being considered by almost every corporate board. Instead, I would like to see my share of these absurd payouts please because I am a owner here.

    For years, I have always felt the anyone paid more that $100,000 a year was over paid and if they couldn't live on a $100,000, they were doing something very wrong. By extension, if they are unable to budget their household to live with $100,000 a year then how can they be financially responsible to my company?

    It strikes me, that in many cases, that this seems more like organized theft by a few shareholders and a level of blind complicity by other board members to insure their comfortable nest are not disrupted.

    I have nothing against capitalism at all. In fact, even I can be "bought off" if it is done fairly through dividends rather than golden parachutes. I might add in fairness to those that can't do the job that you should pay back the money you didn't rightfully earn because you failed to live up to your promises. Due consideration, of course, could be given if there is a GENERAL downturn in the overall market and a small percentage given out for a good try assuming a valid effort was made but that decision should be made by all the owners rather than a select self-serving few.

    This thought is no different than how any other employee is treated during the yearly performance review period within my company. The exception being that during that review there generally is no "claw-back" done, just no raise. As a CEO, you are an employee of the company and should be treated no differently.

    For the members of the board, there is a need to consider changes on how the board operates and how the board looks at the company. My company is not a piggy bank to be pillaged by a select few. Unless, you want to buy off this owner by including me with the pillaging? Or, how about a better idea, where all owners get a piece of the action? Or, how about making sure that every board member has absolutely no stock with the company by any means and thus insuring there is no fiduciary conflict of interest?

    As an MBA, I know there is a way to make everyone happy and to insure that my company will have enough cash to survive without government hand-outs, outrageous loans, and/or to be well managed with the interest of all the owners taken into consideration rather than a select few.

  • Report this Comment On August 17, 2010, at 11:06 PM, fromunder wrote:

    as long as one share equals one vote were out of business. we need to change the rules to say one shareholder one vote and hedgefunds and instututions only get one vote each.

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