Boards of directors are becoming a tough crowd these days. At the slightest hint of impropriety -- let alone actual wrong-doing -- boards are ousting their executives, seemingly on a whim. Undoubtedly, as the drive mounts to hold directors just as accountable for acts of negligence or criminality by executives, this will be a more commonplace event. All too often the board is seen as being complicit in the actions of management, or at the very least acting as enablers, and directors are clamping down.
The ouster of Boeing's (NYSE:BA) CEO Harry Stonecipher over personal indiscretions is the latest manifestation of this phenomenon. While this may, in fact, be good for shareholders in the long run, let's not fall too easily into the cheerleading camp. Even as the CEO is getting the boot, his pocket is often being filled with shareholder largesse.
Boeing's board asked for and received Stonecipher's immediate resignation on March 6, yet he will remain on the company payroll until April 1. During that period of corporate limbo, Stonecipher will still collect his $1.5 million annual salary (or about $60,000 pre-tax), receive a $2.1 million incentive bonus, and have use of the company car and corporate jet (with permission). At least in Stonecipher's case, there was improved corporate performance during his tenure; all too often in CEO ouster-reward situations, boards of directors simply dole out shareholder money for poor performance.
Consider Henry Ancona, the former president of Pegasystems (NASDAQ:PEGA), a provider of business process management software. It never bodes well when senior management suddenly bolts for the door unannounced. Companies want orderly transitions. The sight of executives fleeing for the exit has all the earmarks of cockroaches scattering when the lights are turned on. Ancona scattered just before the company reported an earnings shortfall. Uh-oh. But whether he left voluntarily or was pushed out by the board is immaterial because, even though Pegasystems was unable to deliver the goods for shareholders, Ancona got a nice farewell package.
There were five ways Ancona could separate his employment with Pegasystems, and two of them -- being fired "for cause" or leaving "without good reason" -- would only entitle him to accrued benefits. His abrupt resignation fell within the "without good reason" category, but the board of directors decided to reward him anyway. They changed the basis of his severance package to give him full benefits as "if he were terminated without cause or resigned for good reason." Ancona received $325,000 cash, options worth about $4.5 million, an undisclosed "bonus," and full salary and benefits for a year. The board simply transferred money from shareholders to Ancona's pocket.
Cereal maker Kellogg (NYSE:K) is another company that decided to enrich its departing CEO at the expense of its shareholders. Carlos Gutierrez became the company chairman in 1999, and, by all accounts, he did an admirable job of turning around its business. However, when he was offered and accepted the position of U.S. Secretary of Commerce, he gave up his rights to certain pay and benefits that he had agreed to when he became CEO. Or did he?
Not exactly. The board of directors changed his employment agreement so that he could collect full benefits, as if he had been with the company for 30 years and retired at age 55. Based on his average salary and bonus over the past three years, his pension should be worth more than $2 million. In addition, he received a $500,000 bonus and lump sum payouts under two company investment plans. He sold 400,000 shares of stock options for $4.5 million. And he had already cashed out some 1.2 million in options he had been given the week before that. Sweet deal.
When Scott Livengood resigned from Krispy Kreme Doughnuts (NYSE:KKD), a Motley Fool Stock Advisor selection, the board did not change his original employment agreement, so he did not get a severance package. Instead, he got a "consulting" job with the company for which he would be paid more than $45,000 a month for six months -- essentially the same pay as his CEO salary. I'm sure investors who have seen their shares dwindle from $50 a share to just more than $5 each under Livengood's watch are pleased to know that he will still be advising the company.
By all means, boards of directors should take a stand and get rid of poor, incompetent, or criminal CEOs and other managers. If executive actions will undermine the good name of the company, then the executives should be ejected. That is the purpose of the board, to oversee the operations of management, and for that task they are handsomely paid. But let's not make a mockery of that same fiduciary responsibility and reward those managers on their way out.
Shareholders ought to take note of how their boards deal with management separation, and if they see them doling out the largesse at their expense, they need to remember that it's their money that's being given away and they should start a revolution to overhaul the board.
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Fool contributor Rich Duprey wonders how Krispy Kreme doughnuts can taste so good yet be so mismanaged. He does not own any of the stocks mentioned in this article.
