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Ousted CEOs stay on as exit deals worked out
2006-11-11
The stock options scandal has led to the resignations of more than two dozen U.S. executives, but some companies in the crosshairs don't seem particularly eager to cast off their fallen leaders. Some corporate chiefs are staying on the payroll for weeks, or longer, after stepping down in the wake of probes into options award practices. Others have relinquished their executive posts but are being hired temporarily as consultants; deals that advocates of good corporate governance say can be rife with problems regardless of the circumstances of a CEO's departure. "If you are an investor, you have no idea the extent of hours and the value you are getting for this consulting," said Louis Malizia, assistant director of the Capital Strategies Department at the International Brotherhood of Teamsters, a frequent critic of lofty CEO pay. "It's very lucrative, and who knows the extent of the work?" he said. Corporate America's practice of doling out option grants to top executives is being examined by regulators, the IRS and the U.S. Justice Department. Much of the focus is on backdating, which allows recipients the opportunity to reap extra profits. When boards allow executives tied to options problems to stay on -- even temporarily -- they are sending a mixed message to investors about the seriousness of the problem, said Paul Hodgson, an analyst at the Corporate Library, a corporate governance research firm. "The whole point of them leaving in the first place is removing the taint of scandal from the company," he said. "If they are staying on as a consultant, then the taint has not been removed at all." In one of the highest-profile executive departures linked to options probes so far, UnitedHealth Group Inc. (NYSE:UNH) CEO William McGuire resigned as chairman and as a director last month after the company said it found evidence of backdated options. But McGuire is keeping the CEO title until on or before December 1. The health insurer is trying to hammer out the terms of his departure, but as of earlier this week it said it still had reached no agreement with him. A company spokesman was not immediately available for additional comment. At information security company SafeNet Inc. (Nasdaq:SFNT), two top executives resigned on October 18 after an internal review found instances of backdated option grants, but they will remain employees until year's end. Both executives, ex-chairman and CEO Anthony Caputo and ex-acting financial chief Carole Argo, each will receive their base salary and certain employee benefits during that time. In Argo's case, she can keep her company car while she remains an employee, according to a regulatory filing. The board has set a March 29 date to determine the terms of the two executives' exits, the filing said. SafeNet spokeswoman Donna St. Germain said the two executives would be "consulting on various things" and would help the company in "making a smooth transition." "They haven't been found of doing anything wrong, and they have been such a part of making the company what it is," she said. MIXED SIGNALS TO INVESTORS? Several companies caught in options probes have disclosed formal consulting contracts with outgoing chiefs. At Sapient Corp. (Nasdaq:SAPE), CEO Jerry Greenberg resigned last month after the company found errors related to options grants. According to a regulatory filing, he was hired as a $750-an-hour consultant for an "initial term" of one year. The company also signed a one-year consulting deal with former interim CFO Susan Cooke, who quit following the probe. A company representative was not immediately available to comment on the agreements. Biotechnology firm Medarex Inc. (Nasdaq:MEDX) is in a consulting deal with its former president and chief executive, Donald Drakeman, who stepped down from those posts this week after an options review. Drakeman will be an employee until January 4 and after that will be a paid consultant until March 25. The deal calls for him to be paid $69,825 a month for no more than 15 hours of work each week. Medarex spokeswoman Jean Mantuano said the arrangement is designed "basically to assist in an orderly transition." The Corporate Library's Hodgson said such consulting contracts should not be necessary, though, if companies have succession plans in place. Help with management transition should only be necessary "when the CEO resigns suddenly," he said. "And that's usually when something has gone wrong, so the last thing you want is access to that CEO" through a consulting deal, he said. But others say it's always helpful for a company to tap into a seasoned executive's knowledge. In the case of Medarex, "Drakeman has been a huge part of the success of this company," said Joseph Pappo, a fund manager at Lotsoff Capital Management, which holds the stock in its portfolio. The consulting deal "does not bother me."
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