Corporate Social Responsibility / Human Resources / Organizational Strategy

More Executive Terminations?

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This October, Christopher Viehbacher was let go as CEO of French pharmaceutical company Sanofi.  He is not alone either.  Recently some large companies have made public terminations of top executives such as CEO Steve Bennett of Symantec and Yahoo! COO Henrique de Castro.  This was previously not very common in the business world. Usually companies would try to be pretty discrete about such a matter, often times saying that they were taking leave to spend more time with their families, even when it might not be the case. In a period from 1971 to 1999, 12.3% of CEO turnovers were forced, while 1.7% of those were ousted from office completely.  In a period from 1990 to 2006, those same numbers have increased to 23.1% and 3%, showing that overall there has been an increasing trend in public terminations (Feintzeig).

An upside to these public terminations for the company is that it shows that their board of directors is aware of current issues facing the company and it is willing to exert their authority (Feintzeig).  It’s a demonstration that the company is not susceptible to problems with adverse selection, a situation in which the managing bodies of the company hold more information than the investors and use it to their advantage.  A negative effect from this is that sometimes these boards go too far, using the executive as a “sacrificial lamb”, as Allen Klein, an attorney with Simpson Thacher & Bartlett LLP, puts it (Feintzeig). What this means is the board will make the executive responsible for poor choices made, even though they have the full backing of company directors.

The way that companies describe an executive’s termination can have an impact on how much money they leave the company with in severance.  Usually if executives are terminated without cause, which is typically in a discrete fashion, they receive a larger severance package or payout.  If they are fired in a public fashion in which faults are highlighted, it would be the opposite (Feintzeig). I think a question that then arises from this is should there be a line drawn so that if companies publically terminate an executive this individual will not have to bear the full blame for any inadequacies if directors have in fact supported the decisions?  In other words, will executives be protected from being branded as scapegoats for any shortcomings of their companies?  If they aren’t, directors could very well take advantage of an opportunity to terminate an executive for a bad quarter, leaving him or her with a bad reputation and a lower severance package that this board gets to vote on beforehand.  On the other end of the spectrum, if the company decides to keep the termination discrete, the executive receives a larger payout and gets to keep that reputation, but then the company takes on the blame for current faults.

To me, it seems like there could be an incentive to let the executive take a dive for the company.  I think in order to keep that from happening, there needs to be more clarity from companies on the terms of firing CEOs and other executives; allowing the public to see both sides.  By that, I mean more discretion in terms of both the faults that the executive in question is being ousted for and which of those supposed faults were originally backed or supported by the board of directors.  If the executive is truly at fault for any decline in the company, then he should be let go if it is in fact in the best interest of the company as a whole; but I do not believe that using someone to take the blame is in the best interest for businesses and it is an unethical practice that some may see an opportunity for.  The Sarbanes-Oxley Act has continued to make company actions more transparent in the wake of scandals like Enron, and I think furtherance of provisions such as these would bring more light to the subject.  SOX has already improved ethical decision-making in the business world and continued support and extension for laws such as this will promote ethical business practices, helping to better regulates topics such as this one.

Nick Massack


Sources:

Feintzeig, Rachel. “You’re Fired! And We Really Mean It.” The Wall Street Journal

5 November 2014: B1. Print.

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