Looting, American Style: CEOs Get Big Pre-Bankruptcy Bonuses Even When Lenders and Employees Stiffed
Nothing like paying for failure. The Financial Times describes how CEOs who ran their companies into the ground are nevertheless rewarded with “retention bonus” payouts shortly before the business declare bankruptcy, often mere days ahead.
The absurd rationale is that it is necessary to keep a failed CEO on in order to reduce disruption. It appears instead that boards would rather pay a rich and unwarranted premium to keep a bad known quantity around, perhaps due to personal allegiances to the incumbent or because they might actually have to rouse themselves to oust the dud leader and select a replacement.
Are we to believe that the stipends these boards approve has any relationship with the market value of these CEOs, even charitably assuming someone would hire them after their companies collapses underneath them? Are we to believe there was no able lieutenant worth a battlefield promotion? No retired industry greybeard who could be engaged for an eighteen month to three year gig? No one in the ranks of turnaround expert or “temp for hire” CEOs who would do?
Even worse, some of these payments are flat out looting:
Brad Holly, Whiting’s chief executive who joined the company in November 2017, received $6.4m at the end of March under a new compensation plan approved by the board of directors, which he also chairs, less than a week before the company filed for bankruptcy. Whiting, which expects to emerge from Chapter 11 next month, said last week that Mr Holly would step down as chief executive when that happens and would receive an additional $2.53m in severance.
In total, Whiting paid out more than $14m to executives just a few days before declaring itself bust. In a regulatory filing on April 1 the company said its pay plan was designed “to align the interests of the Company and its employees”. Whiting did not respond to a request for comment.
$6.4 million for Holly for at most five months of babysitting bankruptcy lawyers? Seriously? Another example:
Briggs & Stratton’s board approved more than $5m in retention payments on June 11, including more than $1m to chief executive Todd Teske, who has led the company for a decade. Four days later the company failed to make a $6.7m interest payment on a bond due later this year, and on July 20 it filed for bankruptcy. On July 19, the company’s board voted to terminate the health and life insurance benefits of the company’s retirees…
The company’s 2020 bond is now trading at just a few cents on the dollar, reflecting slim hopes of recovery.
Why are these losers who almost assuredly have nowhere to go being paid in advance? Why aren’t they instead getting $1 per year and working for a contingent payout to be paid when the company emerged from bankruptcy, say tiered based upon results versus specified targets? This is the sort of deal that someone who cared about salvaging the company, as opposed to his personal bottom line, should accept.
This article demonstrates the glaring deficiencies in the US legal regime by describing how these payoffs occur even when lenders and employees are being stiffed:
Retention awards in the run-up to bankruptcy have become more prevalent in recent years, following a 2005 law that restricted the payment of bonuses when a company is actually in bankruptcy proceedings. Critics of pre-filing awards say they flout the spirit of that law, which was intended to curb payouts to executives when a company is in distress.
“It’s regulatory evasion. I don’t like regulatory evasion,” said Jared Ellias, a law professor at the University of California Hastings College of the Law. “It goes to a governance system that is really broken.”
Needless to say, there are ways to keep this sort of thing from happening. I suspect Australia has moved closer to bad American norms, but when I lived in Oz, if a company was “trading insolvent” as in continuing to conduct business when bankruptcy was inevitable, the directors were personally liable.
Similarly, why aren’t these transactions deemed to be fraudulent conveyance? Oh, yes, I know, we are supposed to respect the fiction that it was necessary to pay the washout CEO top dollar to hang around, and therefore the indefensible bonus is supposed to be accepted as representing fair value. And it is a sorry fact that Delaware courts (and most companies are organized under Delaware law) are deferential to the “business judgment” of complicit boards. Lenders charge a premium for mortgages made in states that require the servicer to go to court to foreclose. Maybe they need to wake up and charge more for loans made to companies that elect Delaware law as governing law since Delaware cuts failed managers and boards an awful lot of slack.
By contrast, when an individual declares bankruptcy, pre-bankruptcy transactions are subject to intense scrutiny, particularly if you increased your credit card borrowings before you fell over. But companies are assumed to be operating in good faith.
Even the capitalist-friendly types who subscribe to the Financial Times not only decried this abuse, but warned that the powers that be are playing with fire. From its comment section:
Voice of Truth Another example of crony and socialized capitalism that is so prevalent today. No wonder the nation’s youth is turning toward socialism.
Chang Legalised theft.
Enter the Winter
Briggs & Stratton’s board approved more than $5m in retention payments on June 11, including more than $1m to chief executive Todd Teske, who has led the company for a decade… On July 19, the company’s board voted to terminate the health and life insurance benefits of the company’s retirees.
The following is, I repeat, not a call to violence. It is an observation, and a sincere one: I am slightly surprised by the fact that more of these people don’t literally end up dead. Especially in the US, where not everyone is playing around, and doing this to the wrong person is not impossible.
In reality, it is clear that the top echelon in the US realizes that it may well be on the receiving end of violence, hence the booming business in panic rooms and bunkers faraway. It’s not clear how much further this trend can go, given how many Americans own guns. Sadly, we look to be on track to finding out.