How Courageous are Corporate Boards—CEO Clawbacks
Two former CEOs, Steve Easterbook of McDonalds, and Mark Frissora of Hertz, were in the news last week because of board actions to clawback payments each had received while engaging in misconduct. The boards of the two companies are setting an important precedent by not looking the other way when dismissing CEOs.
Easterbook was fired in November 2019, but “without cause.” He therefore collected severance pay of tens of millions of dollars. An investigation into Easterbrook’s sexual behavior had focused on a consensual relationship with a single employee which violated company policy. Several months after his firing, an anonymous tip to the company alleged at least three other relationships with employees, lying to the company during the initial investigation, and destruction of evidence. As a result, the board authorized a lawsuit to recover the severance payments. Easterbrook’s response to date has been that the company’s investigators had missed evidence of these relationships in his company email account and that was their fault not his. The company has now indicated it has discovered email messages with dozens of nude and sexually explicit photos and videos of Mr. Easterbook with company employees. It appears Easterbrook may have brought a culture of partying with other employees when he joined McDonald’s in 2015.
Frissora’s misconduct was financial and not sexual. Frissora served as Hertz’ CEO from 2006 to 2014, leaving Hertz when poo financial results and accusations of irregular accounting issues emerged. Frissora was under heavy pressure for improved financial results from activist investor Carl Icahn and other shareholders. Frissora, according to the SEC complaint which fined Hertz $16 million in 2019, approved the publication of earnings guidance far above anything the company could achieve, and then pressured finance staff to close the gap between the projected and actual earnings. Among other “earnings management” used, the company raised the estimate of what the company could recover for vehicle damages caused by car renters. This increased earnings by millions alone.
Pressed by the Securities and Exchange Commission, Hertz fired Frissora and eventually lowered pre-tax earnings for the 2013-2014 by $235 million. The problem was that Frissora had already been paid bonuses based on the inflated earnings. Last week, after years of negotiations, and after Frissora had served a four year stint as CEO of Caesars Entertainment Corporation, he agreed to repay $2 million in incentive compensation.
Clawbacks were authorized by the Dodd Frank Act of 2010 which followed the financial meltdown of 2008. In addition, many CEO contracts today include specific clawback provisions which authorize the company to recover CEO pay for misconduct and under other conditions. But clawbacks remain rare. Only a courageous board will go to the effort of filing suit and demanding repayment. Most boards prefer to move on, inadvertently giving future CEOs the incentive to push the envelope of acceptable behavior with little fear that they will eventually have to pay up. And with annual executive compensation in the millions, CEOs may choose to manipulate earnings or withhold information in order to hit one more payday.
Relevant articles:
Board Seeks to Recover Severance Payments to McDonalds CEO