Executive compensation packages: Who has the right to question them?

Welsh, Clitheroe highlight issue of who provides consent for lavish perks

Recent revelations regarding Jack Welsh, past chairmain of General Electric, and Eleanor Clitheroe of Ontario Hydro raise fresh questions regarding the nature and extent of benefits in the executive suite. In Welsh’s case many stakeholders are openly debating the justification for his enormous benefit entitlements; in the instance of Clitheroe, the courts may be the final arbiter of the propriety of a senior officer’s entitlement to non-conventional benefits arising from office.

The issue revolves around the fiduciary aspect of employment in a significant corporate role. Although there is little question there is a fiduciary quality to senior employment, the parameters of such fiduciary obligation is often a difficult matter. A senior employee owes a “duty of utmost good faith” to the employer which usually translates to a strict and strenuous obligation of full disclosure. More often than not this duty is litigated in the context of departing employees and the need for companies to protect secrets. But fiduciary obligations are increasingly being used to police the performance and behaviour of employees.

In the context of behaviour the Clitheroe case allows for timely analysis of good faith obligations of a senior officer and to whom those obligations are owed. Clitheroe was president and CEO of the government-owned utility, reporting to the board of directors. In the throws of privatization, the membership of the board changed. The new board became aware of numerous abnormal benefits of office being enjoyed by Clitheroe and terminated her employment allegedly for cause. In particular, the board alleged her conduct included:

•use of contractors, otherwise retained in relation to company business, for renovations to a personal residence resulting in payment by Ontario Hydro, with a delay in repayment by Clitheroe;

•excessive personal use of a car service allegedly restricted to work and work-related use, while already receiving a company car and a transportation allowance;

•personal use of a corporate credit card;

•using the company to administer both personal and business expenses, resulting in confusion; and

•obtaining club memberships at the company’s expense, many of which had no apparent business-related purpose.

These allegations are as yet unproven and Clitheroe is seeking damages for wrongful dismissal and other issues relating to loss of office.

What is interesting in a case such as Clitheroe, and in the public debate relating to Welsh’s very public divorce process, is to analyze what duty these senior officers owe and to whom it is owed. Moreover, does the receipt of these types of benefits by a CEO, that have been largely dictated by that senior officer, truly create just cause for dismissal? The answer is a resounding “maybe.” For instance, an executive officer and the company can reasonably provide very substantial collateral and even unconventional benefits if they are reasonable and provided with full disclosure.

Disclosure capable of legitimizing entitlement to such benefits can occur in numerous ways. Perhaps the most compelling form is the employment contract itself, wherein the type and extent of benefits are outlined. Where entitlement is created pursuant to contract, there is little vulnerability to the executive except in the instance of abuse. Another form of disclosure can evolve through legitimizing an entitlement due to express or, more dangerously, implied authorization from a higher ranking officer or, in the case of the CEO, the board. Finally, authorization can in fact come “in arrears” through approval of a previously unauthorized benefit. But this latter form of legitimacy begs the question of how effective such ratification can be, and who is to supply the consent?

The question becomes who has the right to question the extent and cost of benefits which in the normal work world appear extravagant and, to some, born of greed. As the economy swings and the returns on investment fall, many stakeholders are asking the law to follow suit and recognize the right of a shareholder to question extravagance by executives. To a large degree the law has said such a remote stakeholder has no business in the boardroom, at least to the degree of questioning the reasonableness of corporate remuneration and benefits. Such second-guessing, it is often said, has a place only in the democratic forum of the directors’ election. But it is quite clear, as fiduciary obligations evolve and legislation stiffens in the post-Enron and WorldCom environment, the rights of all stakeholders may easily evolve into a legitimate questioning of the legality of an executive’s over-reaching remuneration and benefit package.

More immediate to the Clitheroe matter is whether such alleged over-reaching is cause for dismissal. While the Clitheroe case must be left to the courts to decide or the parties to settle, the open debate it engenders regarding the quasi-public trust owed by an officer of an entity like Ontario Hydro remains intriguing. Who has a right to second-guess benefit entitlement? What mechanisms of legitimacy are available to a senior executive in the context of questioned benefit receipt?

While just cause can be established where an executive arranged to receive benefits to which they are not entitled, it remains an open question as to who can second-guess such entitlement and, more importantly, whether the facts of the particular case demonstrate a legitimate, albeit sometime contrived, rationale for receipt of those benefits.

Mark Ellis is the author of the leading text, Fiduciary Duties in Canada, and has a general employment law practice with a specialty in director, officer and employee liability. He can be reached at (416) 822-3801 or mark.ellis@ca.eyi.com.

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