Just Cause: Some Firms Cut
Boards Are Devising Pacts That Make It Easier to Fire CEOs
By JoAnn Lublin
The Wall Street Journal
Monday, March 13, 2006
Some companies are making it easier to dismiss their chief
executives without handing over big bucks.
Walt Disney Co.,
ImClone Systems Inc. and
NCR Corp., among others, have devised new reasons they can
fire their CEOs for cause. A leader terminated for cause
usually can't collect severance.
So far, the trend appears limited to a handful of big
companies. Moreover, the additional grounds for dismissal often
are relatively modest -- indictment for certain felonies, for
example, instead of the more typical clause requiring that a CEO
be convicted first.
David Yermack, a New York University finance professor and
executive-compensation specialist, describes the new clauses as
"window dressing," because the chances they will be invoked are
Still, certain corporate-governance watchdogs cheer the
development. The trend "shows we're getting a better class of
directors and chief executives," says Nell Minow, editor of
Corporate Library, a research group in Portland, Maine. "We're
getting closer to the time when poor performance will be grounds
for terminating for cause."
Governance experts and activist shareholders have long
complained about extravagant departure deals for ousted chiefs.
Last week, two union pension funds sued
Hewlett-Packard Co., its board and former CEO Carly Fiorina,
alleging the Silicon Valley computer giant violated its
severance policy by paying her more than $21 million last year
after directors displeased with the concern's performance forced
her aside. H-P has said the suit lacks merit.
Leaders at roughly 80% of the companies in the Standard & Poor's
500-stock index enjoy employment contracts or severance plans,
Corporate Library estimates. The contracts typically let
directors dismiss a chief for cause in cases of deliberate
neglect of duties, gross misconduct, a felony conviction or
Some boards expanding the list are acting after a corporate
crisis. Disney, for example, could fire new Chief Executive
Robert Iger for cause if he should refuse to provide testimony
or cooperate with an investigation "into his or the company's
business practices," according to his October 2005 contract.
Mr. Iger's new contract came just months after Disney directors
won a significant ruling in a years-long battle with
shareholders unhappy about the $140 million exit package granted
to former President Michael Ovitz in 1996.
Mr. Ovitz was fired without cause after 14 months on the job;
his 1995 contract said he could be fired for cause only in the
case of "gross negligence or malfeasance." A Delaware judge
ruled last August that Disney directors upheld their fiduciary
Disney directors didn't put the new clause into Mr. Iger's
contract in a reaction to the Ovitz case, says Mel Immergut, Mr.
Iger's attorney. Instead, he adds, the directors viewed the
clause as "good corporate citizenship." Mr. Iger accepted the
unusual language because "he wanted a contract he could be proud
of," says Mr. Immergut, chairman of Milbank, Tweed, Hadley &
McCloy in New York. A Disney spokesman declines to comment on
the board's motivation but says Mr. Iger's contract will
"influence the negotiation of all future executive contracts."
When Daniel Lynch became the CEO of ImClone in February 2004,
after a stint as interim CEO, he agreed to a contract allowing
directors to fire him for cause if he were indicted under
federal securities laws. Sam Waksal, a former ImClone chief
executive, earlier pleaded guilty to insider-trading charges and
is serving a seven-year prison term.
Last November, ImClone said Mr. Lynch had resigned in a
departure that made him eligible for severance. The board
hasn't named a permanent successor; in January, the company
hired an investment bank to explore a possible sale.
At NCR, directors inserted a clause in the contract of new CEO
William Nuti allowing them to fire him for cause if Mr. Nuti and
his family don't relocate to NCR's headquarters in Dayton, Ohio,
from New York by Aug. 1. Until then, NCR pays for his weekly
commute on the corporate jet.
Directors wanted to make sure they wouldn't "have to pay
severance benefits" if they replaced Mr. Nuti because he failed
to relocate, explains Dan Ryterband, president of Frederic Cook
& Co., New York pay consultants, and a board adviser during the
contract talks. Mr. Nuti declines to comment.
In a related trend that also could limit severance payments,
certain newly recruited CEOs are declining employment contracts
-- weakening their leverage during any negotiations over
Myron "Mike" E. Ullman III spurned a contract when he took the
top job at J.C. Penney Co. in December 2004. "Executive
contracts are much more about divorce than performing your job,"
Penney's lawyers initially expressed concern about Mr. Ullman
not having a contract partly because the retailer can't stop him
from joining a rival after leaving, recalls Burl Osborne, a
Penney director. But board members supported Mr. Ullman's
decision because "we think he is a very trustworthy person," Mr.
The absence of a contract doesn't mean that a deposed chief
executive will leave empty handed. Joseph Galli Jr. quit as CEO
Newell Rubbermaid Inc. late last year after stumbling in
efforts to turn around the Atlanta consumer-products maker.
After lengthy negotiations, the company agreed to pay Mr. Galli
about $4.6 million in separation payments -- including two
years' worth of salary and bonus. "The absence of an employment
contract did not hurt him in any way," says a spokesman for Mr.
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