Sunday, November 7, 2004

Disgraced CEOs go away wealthy

Slowly, companies begin rethinking severance deals

By Rachel Beck
The Associated Press

NEW YORK - PeopleSoft Inc.'s former chief executive lied to Wall Street analysts about the company's business. So what happened to him? He got to keep his job for a year, and when he was finally fired, he walked away with a huge severance package.

This isn't the first time such nonsense has gone on in corporate America, and chances are it won't be the last. It doesn't seem to matter what top executives do wrong, they keep getting paid big bucks when they are shown the door.

Things should only be so good for the rest of us. If they are lucky, average employees who work lower on the corporate ladder get severance packages based on the number of years worked. But some companies only offer as little as two weeks' pay, according to a study released earlier this year by Aon Consulting and the trade group WorldatWork.

Now consider what happened at PeopleSoft, the business software maker currently the subject of a hostile bid from rival Oracle Corp.

PeopleSoft CEO Craig Conway was ousted about a month ago, in part because of his clashes with other senior managers. But there was also a big lie that got him into trouble.

Conway played down the effect on PeopleSoft's business when he was asked at a September 2003 meeting with Wall Street analysts whether customers were holding back purchases because of a potential sale to Oracle.

"The last remaining customers whose business decisions were being delayed have actually completed their sales and completed their orders.

"So, I don't see it as a disruptive factor," Conway said during that discussion with analysts.

And while the board knew those comments were wrong, the company only omitted his answer in a corrected version of the meeting transcript that was filed with the Securities and Exchange Commission, not in a supplemental press release or anything of the like.

The directors, though, believed that Conway made his statements unintentionally. That is, until they recently got a look at a deposition that Conway gave in the poison-pill case.

In it, he admitted that he knew his statement to analysts wasn't true, but said it anyway because he was "promoting, promoting, promoting," according to court transcripts.

That, in part, led to Conway's termination, but he still will walk away with as much as $50 million in severance and other benefits.

That's certainly no small change for someone who misled Wall Street analysts, no less investors who pushed up the stock in the weeks after his bullish comments last year. Conway profited from that, too, when he sold more than 200,000 shares in October 2003 for a profit of about $4.3 million.

How those "golden parachutes" - as the fat severance deals are called - happen has to do with the fact that most employment contracts often loosely define what constitutes "cause" in a termination.

Just doing a bad job isn't cause, nor is being under investigations or a misdemeanor conviction. It may take something like a felony conviction, but lawyers could even challenge that.

"Sooner or later CEOs leave, and companies need to start thinking about an exit strategy as much as they think about hiring them," said Anthony Sabino, an associate professor at the Peter J. Tobin College of Business at St. John's University. "They need to consider what is it going to take to get them out, and the definition of that needs to be expanded."

Maybe the only good news in all of this is that some companies are dumping their contracts, which means fewer guarantees for departing executives. About 40 percent of companies in the Standard & Poor's 500 index don't have written CEO contracts vs. about 30 percent five years ago, according to Paul Hodgson, senior research associate at The Corporate Library, a governance watchdog group.

In some other cases, disgraced executives are still walking away with their pockets lined, but not with as much money as they wanted.

At energy company Dynegy Inc., CEO Chuck Watson was ousted by the board in 2002 after a scandal over accounting fraud surfaced at the Houston-based company. But he still demanded $28.7 million in severance. The company settled in August, agreeing to pay him $22 million to avoid legal wrangling.

This at least shows some shifting in the get-all approach. Change has to start somewhere.

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