A Computer Sciences retirement that may not be…

October 21, 2011

Fine Print

Companies are always complaining about being misunderstood by the public. It might help if they didn’t send mixed messages like the ones Computer Sciences (CSC) is sending about the impending retirement of its chairman and chief executive, Michael W. Laphen, who will be stepping down by October 2012, or sooner once the company names a replacement.

The company announced the move on Tuesday, in a press release complete with all the usual trimmings: language up high carefully noting that it was Laphen who “informed the Board … of his plan to retire,” optimistic and confident comments from Laphen himself, and praise for Laphen’s leadership, dedication and commitment from CSC’s lead director.

You only get a glimpse of the rest of the story the next day, early Wednesday morning, when CSC filed its 8-K detailing the announcement. (Technically, the document was submitted to the SEC a few minutes before 6 p.m. on Tuesday, but that means it missed the deadline for Tuesday filings, and showed up with Wednesday’s early-morning batch.)

The press release attached to the filing was pretty much what went out on the wires on Tuesday afternoon. More interesting was the language in the actual Succession Agreement that was also included. There, Computer Sciences makes clear that “the Company and the Executive mutually agree that his separation from service from the Company shall be treated as a termination of the Executive’s employment by the Company without Cause…” The word “retirement,” of course, implies a voluntary departure at the end of a career; the words “termination without cause” implies just the opposite — it’s normally used when contemplating an executive getting the boot, often for performance issues.

Of course, as some of the coverage of Laphen’s announcement has suggested, CSC hasn’t exactly shined of late. Its shares have lost 40% in the year leading up to the announcement, and the company’s total return has trailed the rest of the IT sector on just about every trailing timeframe Morningstar lists. There’s the publicity over what appears to be the company’s trouble helping Google implement its Google Apps software for the city of Los Angeles (as reported by Ars Technica and The Wall Street Journal). It’s also facing a shareholder lawsuit alleging that it misled stockholders about financial and government-contracting issues.

Being terminated without cause means the payout is pretty nice: a pro-rata incentive award for this year (his target bonus is a minimum of $2 million a year), a severance payment of two years’ salary and target bonus (which the company estimates will work out to $6.75 million) and 18 months’ health-care premiums. In addition, his executive retirement benefits are to be computed as if he’s 62 at retirement (which he won’t be until October next year), resulting in an estimated pension of $81,000 a month for life (or $972,000 a year). All his outstanding equity will vest when he retires — as of April 1, he had 459,474 unvested stock options and 297,414 unvested shares of restricted stock, according to the company’s June 24 proxy.

In return, Laphen is giving up any right to receive new equity awards going forward, and must be available to help his successor, refrain from competing with CSC or recruiting its employees (or disparaging the company), and “provide assistance to the Company in connection with any audit, investigation or any other regulatory or judicial proceeding which involves matters within the scope of his duties and responsibilities…”

In the end, CSC and its board aren’t exactly forthcoming about what’s going on here. If they’re showing him the door, they’re sure disguising the fact with the press release and rosy language. If they’re deciding to treat it as a termination without cause simply to shower him with more pay and benefits, it’s more than a little disingenuous as well.

It turns out there’s one more clue: Laphen could easily have collected pretty much the same severance and benefits, according to the revised employment agreement he inked in December, even if they hadn’t agreed to call it a termination without cause. That’s because those benefits are payable

“[i]n the event (A) Executive’s employment is terminated by the Company without Cause (other than due to death or Disability), or (B) Executive terminates his employment for Good Reason or otherwise if the Board issues its consent to such termination…”

In other words, all they would have had to do is say that his departure was being treated “as a termination of the Executive’s employment by the Executive with the consent of the Board for purposes of the Management Agreement.” They didn’t.

Unfortunately, even that doesn’t make completely clear what’s going on. Still, shareholders may not care — perhaps they’re intent on looking ahead. Hopefully that view will prove better than the one stretching behind them.

Image source: C J Sorg via Flickr

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Michelle taped a segment for Yahoo! Finance earlier this week on the most egregious disclosures we found in the footnotes in September. You can check it out here (though if you’re in an open area, be sure to turn the sound down first). We’ll be doing these segments pretty regularly and will continue to post them here.

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