The Corzine lesson on executive departures…

December 8, 2011

All too often, the abrupt executive departure is an intricate work of fiction, an elaborate kabuki dance intended to hide from investors what is really happening. Sometimes it reads like a hackneyed novel: spending more time with the family, pursuing other interests, a fine job well done, etc.

But it can be much worse. For that, look no further than the March 2011 departure of Michael Roseman from MF Global (MFGLQ), which is now infamously in bankruptcy court. (The company’s former chief executive, ex-New Jersey senator and governor Jon Corzine, is scheduled to testify before the House Agriculture Committee today, telling them, among other things, that he doesn’t know why $1.2 billion in client funds are missing.)

Roseman left his position as MF Global’s chief risk officer after raising concerns about the big bets that the company was making on European bonds, at Corzine’s behest, according to an excellent article by Aaron Lucchetti and Julie Steinberg in Tuesday’s Wall Street Journal. Those warnings, of course, proved prescient — concerns over the size of those investments (they reached $6.4 billion at one point after Roseman’s departure) and the underlying risk led to MF Global’s ultimate downfall. Roseman was told in January that he would be replaced, according to the WSJ, and stuck around a few months to smooth the transition.

But investors knew nothing about this conflict. Presumably, it would have been good to know that the official in charge of assessing risk — and warning against untenable risks — had summoned up the courage to challenge his ultimate boss, and even, as the WSJ tells it, to take his case to the CEO’s bosses, the board.

Instead you get bland language like this lone sentence from the 10-Q the company filed on February 3:

“Mr. Michael Roseman, our prior Chief Risk Officer, received notice from us on January 31, 2011 that his employment will end on April 1, 2011. Mr. Roseman’s separation will be in accordance with the terms of his employment agreement.”

The only other indicator that something might be wrong was the fact that MF Global paid Roseman $1.35 million as he left. But this is all MF Global’s July proxy had to say on the subject:

“Mr. Michael Roseman’s employment with the Company ended effective March 31, 2010. In connection with his separation from the Company, Mr. Roseman was paid severance totaling $1,350,000 under his employment agreement. Mr. Roseman’s severance payment was calculated by adding his fiscal 2011 target cash bonus amount ($500,000), his fiscal 2011 target equity bonus amount ($500,000) and his fiscal 2011 salary ($350,000). All of Mr. Roseman’s unvested restricted stock units vested as of March 31, 2011.”

This is where reading between the lines becomes so critical. Executives who quit of their own volition, especially non-CEOs, rarely get big bucks on their way out the door. Often, that’s a sign that they went unwillingly. And yet, it offers no hint as to why he left: Poor performance? Personality conflict? Someone’s brother-in-law needed a job? There are a million potential reasons, good and bad, for easing someone out, and investors shouldn’t be left to guess.

Things have improved somewhat in a parallel situation, the departure of a corporate board member. Lately, when directors leave a company’s board, shareholders have a decent shot at learning when something is amiss: If the director sends a farewell letter, companies must file it, publicly, with the Securities and Exchange Commission. You’ll often see companies rushing to assert that a director departed without significant disagreements.

It isn’t a perfect system. There have been some high-profile dust-ups — we’ve footnoted incidents at WellCare Health Plans (WCG), State Auto Financial (STFC) and WP Carey (WPC) — but departing directors can still work with companies to sweep their differences under the rug if they want to. And we suspect many of those no-significant-disagreement disclaimers are glossing over quite a bit of disagreement. But it’s a start.

So does it make sense to require companies to disclose whether a departing executive has had significant disagreements with his or her superiors, or with the board? In other situations, does it make sense to require other disclosures, such as alleged malfeasance or even a domestic violence arrest?

Some of these may have little bearing on the company’s fortunes, and no doubt companies and departing executives intent on hiding the facts will find a way to do so. But it would be a start.

Image source: executive departure photo from Shutterstock.com

————

We didn’t catch MF Global in advance. But so far this year, we’ve given footnotedPro subscribers a heads-up on four M&A targets and AMR’s likely bankruptcy, along with dozens of other early warnings and hidden opportunities. We dig through filings to find the bad news — and good — that other investors overlook. To find out more, or to inquire about a trial subscription, please contact us.

Leave a Reply