Blogs & Comment

The ethics of golden handshakes

When an executive leaves in disgrace, what does the organization owe him or her?

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?