Two stories caught my eye this week, the first being the University of Michigan firing its president, the second being Microsoft (MSFT) buying Activision Blizzard (ATVI). The common denominator is reckless behavior by a chief executive.
Questions: How much (if any) money should these men be paid going forward, and should any previous payments be clawed back?
The University of Michigan’s Board of Regents canned president Mark Schlissel after he was found to have had an inappropriate sexual relationship with a subordinate, to whom he sent dozens of emails from his university account, which the board publicly posted.
Ironically, Schlissel announced at a Board of Regents meeting last July “an overhaul of sexual misconduct policy changes, particularly the prohibition of relationships between subordinates and supervisors,” according to MLive.com.
Another irony, according to The Detroit News: Schlissel’s agreement “was originally scheduled to end in June 2024, but the timeline was moved up to 2023. The contract … could have cost the university as much as $10 million over the next decade and set a new bar for payouts to an outgoing public university president…”
As for Microsoft buying Activision Blizzard, sure MSFT coveted the business, but it also found a willing seller ready to deal. (Microsoft is paying $69 billion or $95 per share for the video game maker behind “Call of Duty.” The stock had been trading as high as $104 less than a year ago.) That discount is partly due to the massive quagmire of sexual harassment claims and alleged workplace violations that took place under CEO Bobby Kotick’s watch.
It should be noted that allegations extend to Kotick himself. Specifically, Kotick has been accused of being abusive, turning a blind eye to allegations, and dragging his feet in terms of addressing issues at the company. Enter Microsoft.
Now MSFT faces a Kotick conundrum. Initially Microsoft and ATVI made statements to the effect that Kotick was going to be staying on. Then the Wall Street Journal reported that Kotick is expected to leave once the deal closes. So that means Kotick, like Schlissel at Michigan, will be out.
Both men will lose their salaries going forward, but could get some other payouts. And what about the money that was paid to them prior, specifically during the time that these transgressions occurred? Are they entitled (ahem) to keep?
In Schlissel’s case, a Detroit News story suggests that he won’t get much of that $10 million. But Schlissel is still a tenured faculty and the story notes: “It’s likely that the university and Schlissel will negotiate a confidential settlement for him to leave the university rather than go through trying to strip him of tenure, a process that could take years and end up in court…” But what about the emails the university posted that go back to 2019? Should the university seek to recoup anything from the past two years?
And what about Kotick, (who was on the board of Yahoo from 2003 to 2008 and is currently a board member of Coca-Cola)? He stands to reap some $400 million, mostly from the 3.95 million shares he owns. And then there’s the $154 million Kotick made in 2020.
After all the hurt that has been put on women at Activision Blizzard, and the discomfort imposed upon the other 9,000-plus employees, never mind on the shareholders, this guy gets half a billion dollars?
“Microsoft should probably be considering whether Mr. Kotick is worth his price tag,” says Jennifer Drobac, professor at the Indiana University McKinney School of Law. “If, following their due diligence and their investigation, they demonstrate that he failed to steer Activision in a lawful manner or in one that would at least comply with Activision’s stated company policies, then yes, either they should claw back the money or they should have a termination clause.”
But wait, you can’t just claw back Schlissel’s salary or take away Kotick’s stock, can you? Actually you can.
The template here is what the board of McDonald’s (MCD) did in the case of its then CEO, Steve Easterbrook. In November 2019 the McDonald’s board terminated Easterbrook for having an inappropriate relationship with an employee of a vendor. He was fired without cause, which allowed him to receive 26 weeks of severance and benefits
It turned out the CEO lied. The board was livid and in August 2020 sued Easterbrook. The Wall Street Journal reported: “Easterbrook allegedly engaged in three additional relationships with employees that were sexual in nature … Investigators found that Easterbrook destroyed evidence about the sexual relationships and lied about his behavior … McDonald’s found dozens of sexually explicit photographs and videos of women including the employees that had been sent from Mr. Easterbrook’s corporate email account to a personal Hotmail account … Easterbrook had deleted the photos from his company-issued phone, and they weren’t discovered during the corporate investigation that triggered his firing.” Last month, Easterbrook agreed to return $105 million. Much of the clawback was in stock that was returned to the company, but actual cash was wired back too.
“The board and the board chairman deserve a lot of credit,” says an informed source. “A hell of a lot of boards would not have done anything. They would have made the decision, ‘Let this go away.’”
I asked my source about the implications of the McDonald’s case: “For other boards, if they’re facing these kinds of allegations, maybe they won’t be so tempted to just dismiss someone,” he said.
“Does cleaning house mean you get rid of someone who’s problematic but don’t hold them accountable by following up on allegations and clawing back pay?” asks Jill Fisch, a professor of business law at the University of Pennsylvania Carey Law School.
I know you might be thinking that Easterbrook’s transgressions were worse than Schlissel’s and Kotick’s. Maybe that’s the case. But why should these be binary decisions? If someone is 100% bad, claw back 100%; if they’re 40% bad, claw back 40%. That’s what lawyers are for.
I wonder what the Michigan and Microsoft boards think about that.
This article was featured in a Saturday edition of the Morning Brief on January 22, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer