Would it chill the negotiations for a board to state a corporate policy against severance payments under such circumstances?
Excessive Executive Compensation? An interesting shareholder derivative case alleging a violation of the duty of care arose out of CEO Michael Eisner’s hiring, and subsequent firing, of Michael Ovitz from his position as president of Walt Disney Co. The suit alleged that Eisner and the Disney board had violated their duty of care by hiring Ovitz (who had no previous experience as an executive of a public company in the entertainment industry), as well as when Ovitz was granted a no-fault termination. The consequence of invoking the no-fault clause in Ovitz’s employment contract was that, after barely one year of employment, Ovitz received more than $38 million in cash, as well as 3 million stock options. Notably, the maximum salary Ovitz could have earned actually working was $11 million annually. Following a three-month trial, the Delaware judge wrote, “For the future, many lessons of what not to do can be learned from defendants’ conduct here. Nevertheless, I conclude that . . . the defendants did not act in bad faith, and were at most ordinarily negligent, in connection with the hiring of Ovitz. . . . In accordance with the business judgment rule, . . . ordinary negligence is insufficient to constitute a violation of the fiduciary duty of care.” The court also found that Ovitz could not have been fired for cause because he did not commit gross negligence or malfeasance while serving as Disney’s president. Thus, Eisner did not breach his duty of care by agreeing to the no-fault termination. In 2006, ten years after Ovitz was terminated, this decision was affirmed on appeal by the Delaware Supreme Court. [In re Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005), aff’d 906 A.2d 27 (Del. 2006).] Since 2007, as a result of a change in SEC disclosure rules, shareholders have been receiving more information on executive compensation packages. According to one source, executive severance packages typically “include a payment of three times salary and bonus, immediate vesting of options and restricted stock awards, and, in many cases, payment of taxes owed. . . . [D]ozens of executives could have payouts of $100 million or more.” Questions 1. Apart from the legality, is it ethical for a board to agree to an executive severance package when an executive is terminated for poor performance? 2. Such packages are negotiated as part of the hiring process. Would it chill the negotiations for a board to state a corporate policy against severance payments under such circumstances?
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