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Just Cause: Some Firms Cut Golden Parachute
Boards Are Devising Pacts That Make It Easier to Fire CEOs Without Severance
By JoAnn Lublin
The Wall Street Journal
Monday, March 13, 2006

Some companies are making it easier to dismiss their chief executives without handing over big bucks.

Walt Disney Co., ImClone Systems Inc. and NCR Corp., among others, have devised new reasons they can fire their CEOs for cause.  A leader terminated for cause usually can't collect severance.

So far, the trend appears limited to a handful of big companies.  Moreover, the additional grounds for dismissal often are relatively modest -- indictment for certain felonies, for example, instead of the more typical clause requiring that a CEO be convicted first.

David Yermack, a New York University finance professor and executive-compensation specialist, describes the new clauses as "window dressing," because the chances they will be invoked are "remote."

Still, certain corporate-governance watchdogs cheer the development.  The trend "shows we're getting a better class of directors and chief executives," says Nell Minow, editor of Corporate Library, a research group in Portland, Maine.  "We're getting closer to the time when poor performance will be grounds for terminating for cause."

Governance experts and activist shareholders have long complained about extravagant departure deals for ousted chiefs.  Last week, two union pension funds sued Hewlett-Packard Co., its board and former CEO Carly Fiorina, alleging the Silicon Valley computer giant violated its severance policy by paying her more than $21 million last year after directors displeased with the concern's performance forced her aside.  H-P has said the suit lacks merit.

Leaders at roughly 80% of the companies in the Standard & Poor's 500-stock index enjoy employment contracts or severance plans, Corporate Library estimates.  The contracts typically let directors dismiss a chief for cause in cases of deliberate neglect of duties, gross misconduct, a felony conviction or company-related fraud.

Some boards expanding the list are acting after a corporate crisis.  Disney, for example, could fire new Chief Executive Robert Iger for cause if he should refuse to provide testimony or cooperate with an investigation "into his or the company's business practices," according to his October 2005 contract.

Mr. Iger's new contract came just months after Disney directors won a significant ruling in a years-long battle with shareholders unhappy about the $140 million exit package granted to former President Michael Ovitz in 1996.

Mr. Ovitz was fired without cause after 14 months on the job;  his 1995 contract said he could be fired for cause only in the case of "gross negligence or malfeasance."  A Delaware judge ruled last August that Disney directors upheld their fiduciary duty.

Disney directors didn't put the new clause into Mr. Iger's contract in a reaction to the Ovitz case, says Mel Immergut, Mr. Iger's attorney.  Instead, he adds, the directors viewed the clause as "good corporate citizenship."  Mr. Iger accepted the unusual language because "he wanted a contract he could be proud of," says Mr. Immergut, chairman of Milbank, Tweed, Hadley & McCloy in New York.  A Disney spokesman declines to comment on the board's motivation but says Mr. Iger's contract will "influence the negotiation of all future executive contracts."

When Daniel Lynch became the CEO of ImClone in February 2004, after a stint as interim CEO, he agreed to a contract allowing directors to fire him for cause if he were indicted under federal securities laws.  Sam Waksal, a former ImClone chief executive, earlier pleaded guilty to insider-trading charges and is serving a seven-year prison term.

Last November, ImClone said Mr. Lynch had resigned in a departure that made him eligible for severance.  The board hasn't named a permanent successor; in January, the company hired an investment bank to explore a possible sale.

At NCR, directors inserted a clause in the contract of new CEO William Nuti allowing them to fire him for cause if Mr. Nuti and his family don't relocate to NCR's headquarters in Dayton, Ohio, from New York by Aug. 1.  Until then, NCR pays for his weekly commute on the corporate jet.

Directors wanted to make sure they wouldn't "have to pay severance benefits" if they replaced Mr. Nuti because he failed to relocate, explains Dan Ryterband, president of Frederic Cook & Co., New York pay consultants, and a board adviser during the contract talks. Mr. Nuti declines to comment.

In a related trend that also could limit severance payments, certain newly recruited CEOs are declining employment contracts -- weakening their leverage during any negotiations over separation pay.

Myron "Mike" E. Ullman III spurned a contract when he took the top job at J.C. Penney Co. in December 2004.  "Executive contracts are much more about divorce than performing your job," he observes.

Penney's lawyers initially expressed concern about Mr. Ullman not having a contract partly because the retailer can't stop him from joining a rival after leaving, recalls Burl Osborne, a Penney director.  But board members supported Mr. Ullman's decision because "we think he is a very trustworthy person," Mr. Osborne says.

The absence of a contract doesn't mean that a deposed chief executive will leave empty handed.  Joseph Galli Jr. quit as CEO of Newell Rubbermaid Inc. late last year after stumbling in efforts to turn around the Atlanta consumer-products maker.  After lengthy negotiations, the company agreed to pay Mr. Galli about $4.6 million in separation payments -- including two years' worth of salary and bonus.  "The absence of an employment contract did not hurt him in any way," says a spokesman for Mr. Galli.

Theory & Practice is a weekly look at people and ideas influencing managers.  Send comments to theorypractice@wsj.com.

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