Ethics of Golden Handshakes

When an executive leaves in disgrace, what does the organization owe him or her? How should a Board handle such situations? In some cases, contractual obligations may seem to settle the matter, but contracts can be contested. Should they be? Does the IMF’s Dominique Strauss-Kahn deserve a quarter million dollars?

For further food for thought, see this story, by Tom Hals and Dena Aubin, for Reuters: Strauss-Kahn severance revisits CEO pay dilemma

The IMF now faces a challenge that keeps members of corporate compensation committees up at night: explaining why they may have to pay a handsome severance package to an indicted executive.

Former International Monetary Fund managing director Dominique Strauss-Kahn, facing charges of attempted rape in New York, resigned his post from the global lender on Wednesday.

Strauss-Kahn’s contract entitles him to a one-time severance payment of $250,000, the IMF said on Friday….

Whether a Board of Directors should attempt to fight in order not to pay severance to an executive who has brought disgrace upon the organization is clearly going to depend on the circumstances. But it serves as a good example of the conflict between two different styles of moral reasoning. On one hand, a Board thinking primarily in terms of consequences might well reason this way: “Look, we need to get past this unfortunate incident. Let’s pay this guy the money his contract says he is owed, and be done with it. It’s better for the firm, overall, if we pay and get this finished.” On the other hand, a Board might think primarily in terms of justice: “This guy has brought shame (or at least notoriety) upon the organization. He doesn’t deserve a dime. We should fight for what’s fair.”

The tension between these two styles of moral reasoning is an ancient one, and it’s perfectly reasonable to find something attractive in both styles of reasoning. But the fact that both kinds of reasons might occur to a single group of people — a Board of Directors — in a single situation implies an interesting question. Even if we were to agree (even for sake of argument) that a Board of Directors’ main obligation is to serve the interests of the organization and its shareholders, that still leaves open this important question: should a Board of Directors seek the best outcomes for the organization and its shareholders, or should it seek justice for it and for them?

2 comments so far

  1. Brian Finch on

    The DSK affair provides a microscope for examining a number of ethical issues: I’ve blogged, for example, on the corporate governance implications. Your golden handshake perspective is fascinating but, I think, wider than the consequences/justice dilemma.

    There is the legal aspect: could the board avoid payment even if it wanted to? There is the identification issue: ‘this guy is one-of-us, we must treat him as we would wish to be treated’. Identification problems may explain some of the worldwide explosion in executive remuneration. Identification is linked to an ‘oligarch’ problem;

    …years ago I took part in a business game between teams carrying out real projects for small sums of money. It revealed that winning the game was easy if you cheated, as long as few others did. Getting on to the game’s ‘governing board’ and increasing one’s pay, as well as taking bribes proved a winning strategy. By analogy, if the top guys in the world/business all help and cover for each other then, as a group, they achieve an optimum outcome.

  2. Chris Oestereich on

    This post begs the discussion of the reputational risk created by the severance payment. Many boards would likely see the 1/4 million dollars as worthwhile in financial terms for not prolonging the incident via a lengthy legal battle. This view must be balanced against the potential damage the payment could cause to a firm’s reputation. Will customers and investors hit the exits in response to the action? The recent uproar caused by GoDaddy.com’s Bob Parson’s serves as a nice example. (http://mashable.com/2011/03/31/godaddy-ceo-elephant/) The firm is private, so there’s not a ticker to view the impact to the firm’s value from this incident, but I’m certain that I’m not alone in choosing to renew domains elsewhere.
    As for the IMF, I would recommend that the board reach out to DSK, asking that he offer to forgo the severance. I’d further inform him that failure to do so would force the IMF to seek legal recourse.


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