Where Will the Deposed CEOs Go?

Suzanna De Baca -- Expert Business Source, 9/23/2008 11:58:00 AM

The financial crisis of 2007 and 2008 has taken its toll on the American population, but it has also left a trail of washed up CEOs in its wake.  Chief Executive Officers are dropping like flies in a domino-like chain reaction of firings across Wall Street. While we members of the public are left licking our financial wounds, what happens to the guys who allegedly stopped minding the store? 

The Washed Up CEOs Club has been around for a while and just seems to be getting larger and larger.  But a distinction needs to be made between the various types of members; while some of these C-Level execs are actually guilty of criminal behavior, others are legally innocent yet overpaid head honchos who lacked risk management or general management skills.  And what about the latest crop?  Is this newest horde of ejected Wall Street CEOS a bunch of unfortunate Type As who were trying to compete in an increasingly crazy market environment and got caught in an out of control game?

The first category – the criminals – can be found commiserating in the Big House.  In the recent past, a fair number of top dogs who brought their companies down were found guilty of actual crimes and sentenced to prison.  Enron’s ex-CEO Jeff Skilling was sentenced to 24 years in prison for fraud and insider trading.  Tyco’s CEO Dennis Kozlowski, who later said he was embarrassed by the bacchanalian $2 million Sardinian birthday party he threw for his now-ex wife Karen, is in jail as well.  Ken Lay, Skilling’s colleague and predecessor, was convicted of fraud and sentenced to prison but died of a heart attack before he served any time.  These very public trials underscored to anyone watching the news that running a huge company is extremely complicated and that even the best auditors can’t detect conspiracy and deception.  But shareholders and the folks in the jury box know right from wrong and these former leaders are now moldering in the clink.  Small consolation for the public’s losses, but better than nothing.

The second category of Washed Up CEOs  includes a lucky pool of excessively compensated poor performers. A sizeable crew of the CEOs who were ousted in the last few years have slid quietly into “retirement.”  And they have typically been well compensated for their embarrassment, gliding comfortably into their post-C-suite lives in the protective shade of their enormous golden parachutes.  Stanley O’Neil, the former CEO and Chairman of the Board of Merrill Lynch, was relieved of his duties last year, but the blow was cushioned by a $160 million exit package.  Even with Merrill’s cheap sale to Bank of America, he’s probably golfing with former Morgan Stanley CEO Phil Purcell, who in 2005 who was forced out with a cool $43.9 million plus $250,000 a year for life according to a November 11, 2007 Forbes.com article by Liz Moyer.  Moyer also reported that when Robert Nardelli, former CEO of Home Depot, was booted in 2007, he landed softly with his $210 million parachute.  One more ex-CEO and these guys can find a foursome for golf– maybe Charles Prince, who was booted from Citi last fall, can round out their game.  Prince’s Citi stock is way down and his options probably worthless, but he got away with at least part of his bankroll in tact. Not only is this little consolation for shareholders but just plain irritating.

The recently deposed of the last few months will not fare so well, however, depending on how much they had socked away in diversified investments before their firms crashed and burned.  Interestingly, many of the CEOs who in the last year or so steered Wall Street’s most venerable intuitions into the ground had long, distinguished histories of responsible leadership.  Maybe they weren’t the warm and fuzzy guys you want to barbeque or catch Monday night football with, but there is no evidence that they were involved in conscious collusion. Are they guilty of negligence, were they just trying to compete in a crazy market environment, or were they completely ignorant of the risks to which their firms were exposed?  Or were they all incompetent?  Perhaps time will tell.

In any case, these leaders will not necessarily end up with giant severance packages and cushy lifestyles of unseated CEOs from earlier times.  Nor will they fall back on cushy stock option packages.  With much of their own fortunes tied up in the stock of their companies, these CEOs are going to be facing hard times along with the shareholders. Small consolation for the public’s losses, but better than nothing.

James Cayne, the ex-CEO of Bear Stearns, saw his fortune dwindle along with the price of his stock.  Some employees were furious at Cayne for playing in bridge tournaments the week the firm was forced to sell itself for pennies to JP Morgan, but these days he’ll be playing bridge in much reduced circumstances.  Last March, the former near-billionaire’s stock holdings were estimated to have dropped to under $12 million.  That seems like a lot, but compared to his cronies, the guy is broke.  Lehman Brother’s ex-CEO, Richard Fuld, Jr., under whose watch the firm plunged into bankruptcy, stands to collect $9.3 million in severance pay, which includes retirement benefits and deferred compensation, if he is deemed to have left “without cause;” the outcome of that plan that remains to be seen.  According to Equilar, an executive pay research firm, he collected $12.4 million in cash compensation and stock options since he took over as CEO in 2004.  Needless to say, his options are worthless.

Fannie Mae CEO Daniel H. Mudd and his counterpart at Freddie Mac, Richard Syron both had golden parachutes, but a Federal Housing Authority statement released on Sept. 15, 2008 (and reported by the WashingtonPost.com) stated that these severance agreements will not be paid. 

Robert Willumstad took over the CEO job at AIG in the spring of this year, replacing Martin Sullivan. He was lured to the post the promise of a hefty severance package – estimated to be $22 million-- following a long career at Citigroup and a short tenure as Chairman of AIG.  Having failed to quickly turn the firm around in the three short months at which he was at its helm, Willumstad stepped down during the Fed’s bailout of AIG and has declined the severance.  A classy move for a man who clearly recognizes his responsibility, even if brief, to shareholders. 

Is humiliation and financial decline enough punishment for these dethroned CEOs?  Will they turn to philanthropy and community work to try and make up for the financial losses and economic mess they created or perpetuated?  Will anyone feel sorry for them?  The latter is unlikely.  They had tough jobs and they accepted them.  Whether or not these CEOs started the credit craziness or inherited part of it, they agreed to play the game.  And they lost dramatically in a financial crisis that will not be forgotten for a long time.

So what will happen to them?  Hopefully, they can find comfort with each other.  They can join the Washed Up CEOs club, where they can drink and talk about their glory days.  The days of deregulation, high returns and leverage.  The days of big compensation packages and private planes.  Perhaps they can band together and form a support group, seeking solace and escape from the media and disgruntled investors.  And on their way home, they can stop at the gas station like regular folks, complain about the price of gas, and wonder how they’re going to retire – just like the shareholders they were supposed to protect.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor.  Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.