Question

Two important issues in corporate governance are (1) the rules that cover firing a CEO and (2) board members are compensated appropriately. True False

Answer 1

The common perception is that boards are good at hiring CEOs but bad at firing them. The humorous explanation is that boards contract out to a search firm for hiring but have to do the firing themselves. Of course, reality is more nuanced. Boards actually make both decisions and they often hire a law firm when firing the CEO.

Carol Bartz was fired by phone at Yahoo. Another example that came up was a CEO “fired by limo driver.” The CEO was told to get on a plane and go to another town for an emergency meeting. After arriving in town, the CEO wanted to drop off their luggage but was told by limo driver to keep the luggage in the car for the return trip to the airport. Oops.

CEOs are rarely fired “for cause.” That would reduce their severance but could also drag parties through mutual mud slinging that might accompany a lawsuit. Reputations could be damaged.

Speaking of lawsuits, there were lots of warnings from several parties about sending e-mail back and forth critical of the CEO. “E” stands for evidence… and e-mail. Be careful; don’t be definitive. Don’t create a discoverable record you wouldn’t want the world to see. Have those discussions but make them privileged conversations with counsel.

There were also discussions around what to tell the public. Is it better to be straight — something like irreconcilable differences, or to say the CEO is leaving “for personal” reasons? If nobody believes the press release it could tarnish the company further. Perhaps the new norm will simply be the CEO has left the company… but does that really give a different impression than “for personal” reasons? A lot of word smiting and checking with counsel is likely to be needed in most cases no matter what reason is given.

A chair in a much better position to fire the CEO than a lead director. Whatever you do, don’t send someone to fire the CEO who is likely to be “talked out of it.” Awkward, awkward. Saying “the board has lost confidence” should be a sign that it is time to go, but unbelievably a few boards have been known to keep CEOs on after even after firing, thinking that if they have to give the CEO a year’s severance, they should get another year’s worth of work out of them. Hopefully, if you’ve decided to fire your CEO, the more you really want is less.

Someone needs to be having that discussion with the CEO. Don’t usually do that in a board meeting. Yes, discuss specific results there but not the underlying personal issues. The chair should talk to the CEO after every meeting, probably more frequently. An interesting term came up, the “board whisperer,” the one who tells the CEO “you’re in deep… and we need to talk about this.” Someone needs to take on the role of giving the CEO a fuller picture. I like it. I could see Ralph Ward writing a whole book with that title… The Board Whisperer.

Of course, another advantage of early and frequent communication is that it is a two way street. The board will learn much more about the CEO’s perspective and both

parties will have an opportunity to correct course.

The compensation packages for the Company’s Chief Executive Officer and other members of the Board of Directors who also serve as executive officers of the Company shall be determined by the non-executive members of the Board of Directors in accordance with this Policy, based upon recommendations from the Compensation Committee. The Compensation Committee may take into account pre-existing arrangements between the Company and the Executive Directors in determining the appropriate compensation levels. The Company may, from time to time, enter into employment or similar arrangements with its Executive Directors, as it determines necessary of appropriate. The compensation package for the Executive Directors shall be reviewed periodically by the Compensation Committee and the non-executive members of the Board of Directors in accordance with the Company’s internal policies (including this Policy).   

In determining the appropriate levels of compensation for the Executive Directors, the non-executive members of the Board of Directors (and the Compensation Committee) shall take into account industry standards and pre-existing arrangements. Generally, it is expected that the compensation for the Executive Directors will include some or all of the following components, though nothing in this Policy shall be deemed to prohibit the non-executive members of the Board of Directors from determining to include other components in an Executive Director’s compensation package: A fixed component: gross annual base salary; A variable component: An annual bonus of up to a specified percentage of gross annual base salary based upon the achievement of specified individual, Companywide, and/or business unit performance goals established by the Compensation Committee in consultation with the non-executive members of the Board of Directors; and Grants of stock options, stock awards, or other equity compensation, generally linked to the attainment of defined and measurable objectives;

Severance pay upon termination of employment.

A. Gross Annual Base Salary

The gross annual base salary shall be subject to review annually by the Compensation Committee in light of the Executive Directors’ performance and as well as the Company’s performance, changes in compensation benchmarks, industry standards, and/or inflation. The Compensation Committee may propose a reasonable salary increase or decrease, if any, for approval to the non-executive members of the Board of Directors.

The Executive Directors may be eligible for bonuses calculated as a percentage of their gross annual base salaries. The payment of any such bonus shall be contingent upon the attainment of defined goals, which shall be identified by the Compensation

Committee to further both the short-term objectives and long-term growth of the Company. These goals shall be set at the beginning of each year by the Compensation Committee in consultation with the non-executive members of the Board of Directors. The extent to which the Executive Director has achieved these goals shall be determined by the Compensation Committee in the course of the annual review and the amount of the bonus payment consequently proposed shall be submitted for approval to the nonexecutive members of the Board of Directors. The bonuses may be paid in cash, stock or deferred at the discretion of the non-executive members of the Board of Directors.

The Executive Directors may be eligible for grants of stock options, restricted shares, or other equity compensation. In order to correlate executive compensation to the creation of shareholder value, the Executive Directors shall be eligible for participation in the then-current equity compensation plan (the “Plan”) of the Company, which shall set forth the appropriate terms and conditions under which awards shall be granted. The Compensation Committee may nominate any Executive Directors for grants of options, stock awards, or other equity compensation, determining the number of options or shares to be granted, if any, and the relative terms and conditions of grant, all in accordance with the Plan. Each such grant shall be subject to approval of the non-executive members of the Board of Directors. The non-executive members of the Board of Directors may subject the equity awards to any conditions as it determines appropriate, including subjecting the awards to vesting.

The Executive Directors may be eligible for severance pay upon termination of employment by the Company under the terms of their individual employment agreements or as otherwise determined by the non-executive members of the Board of Directors from time to time. The right to receive severance may be conditioned upon the Executive Director executing (and not revoking) a general release in favor of the Company and its affiliates and the Executive Director continuing to comply with the any restrictive covenants (noncompete, non solicit, non disparage, confidentiality, etc.) to which he or she may be subject.

The Executive Directors may be eligible for additional compensation for acting as a member of the Board of Directors of the Company (or any other position thereon) or as a director or officer of any subsidiary of the Company, including gross annual fees or standard gross attendance fees per board or committee meeting, as determined by the non-executive members of the Board of Directors from time to time. Upon presentation of properly documented expense claims, the Executive Directors shall be entitled to reimbursement by the Company of out-of-pocket expenses wholly, exclusively, and necessarily incurred to attend board, committee, or shareholder meetings and fulfill related duties.