Looting, American Style: CEOs Get Big Pre-Bankruptcy Bonuses Even When Lenders and Employees Stiffed

Nothing like paying for failure. The Financial Times describes how CEOs who ran their companies into the ground are nevertheless rewarded with “retention bonus” payouts shortly before the business declare bankruptcy, often mere days ahead.

The absurd rationale is that it is necessary to keep a failed CEO on in order to reduce disruption. It appears instead that boards would rather pay a rich and unwarranted premium to keep a bad known quantity around, perhaps due to personal allegiances to the incumbent or because they might actually have to rouse themselves to oust the dud leader and select a replacement.

Are we to believe that the stipends these boards approve has any relationship with the market value of these CEOs, even charitably assuming someone would hire them after their companies collapses underneath them? Are we to believe there was no able lieutenant worth a battlefield promotion? No retired industry greybeard who could be engaged for an eighteen month to three year gig? No one in the ranks of turnaround expert or “temp for hire” CEOs who would do?

Even worse, some of these payments are flat out looting:

Brad Holly, Whiting’s chief executive who joined the company in November 2017, received $6.4m at the end of March under a new compensation plan approved by the board of directors, which he also chairs, less than a week before the company filed for bankruptcy. Whiting, which expects to emerge from Chapter 11 next month, said last week that Mr Holly would step down as chief executive when that happens and would receive an additional $2.53m in severance.

In total, Whiting paid out more than $14m to executives just a few days before declaring itself bust. In a regulatory filing on April 1 the company said its pay plan was designed “to align the interests of the Company and its employees”. Whiting did not respond to a request for comment.

$6.4 million for Holly for at most five months of babysitting bankruptcy lawyers? Seriously? Another example:

Briggs & Stratton’s board approved more than $5m in retention payments on June 11, including more than $1m to chief executive Todd Teske, who has led the company for a decade. Four days later the company failed to make a $6.7m interest payment on a bond due later this year, and on July 20 it filed for bankruptcy. On July 19, the company’s board voted to terminate the health and life insurance benefits of the company’s retirees…

The company’s 2020 bond is now trading at just a few cents on the dollar, reflecting slim hopes of recovery.

Why are these losers who almost assuredly have nowhere to go being paid in advance? Why aren’t they instead getting $1 per year and working for a contingent payout to be paid when the company emerged from bankruptcy, say tiered based upon results versus specified targets? This is the sort of deal that someone who cared about salvaging the company, as opposed to his personal bottom line, should accept.

This article demonstrates the glaring deficiencies in the US legal regime by describing how these payoffs occur even when lenders and employees are being stiffed:

Retention awards in the run-up to bankruptcy have become more prevalent in recent years, following a 2005 law that restricted the payment of bonuses when a company is actually in bankruptcy proceedings. Critics of pre-filing awards say they flout the spirit of that law, which was intended to curb payouts to executives when a company is in distress.

“It’s regulatory evasion. I don’t like regulatory evasion,” said Jared Ellias, a law professor at the University of California Hastings College of the Law. “It goes to a governance system that is really broken.”

Needless to say, there are ways to keep this sort of thing from happening. I suspect Australia has moved closer to bad American norms, but when I lived in Oz, if a company was “trading insolvent” as in continuing to conduct business when bankruptcy was inevitable, the directors were personally liable.

Similarly, why aren’t these transactions deemed to be fraudulent conveyance? Oh, yes, I know, we are supposed to respect the fiction that it was necessary to pay the washout CEO top dollar to hang around, and therefore the indefensible bonus is supposed to be accepted as representing fair value. And it is a sorry fact that Delaware courts (and most companies are organized under Delaware law) are deferential to the “business judgment” of complicit boards. Lenders charge a premium for mortgages made in states that require the servicer to go to court to foreclose. Maybe they need to wake up and charge more for loans made to companies that elect Delaware law as governing law since Delaware cuts failed managers and boards an awful lot of slack.

By contrast, when an individual declares bankruptcy, pre-bankruptcy transactions are subject to intense scrutiny, particularly if you increased your credit card borrowings before you fell over. But companies are assumed to be operating in good faith.

Even the capitalist-friendly types who subscribe to the Financial Times not only decried this abuse, but warned that the powers that be are playing with fire. From its comment section:

Voice of Truth
Another example of crony and socialized capitalism that is so prevalent today. No wonder the nation’s youth is turning toward socialism.

Chang
Legalised theft.

Enter the Winter

Briggs & Stratton’s board approved more than $5m in retention payments on June 11, including more than $1m to chief executive Todd Teske, who has led the company for a decade… On July 19, the company’s board voted to terminate the health and life insurance benefits of the company’s retirees.

The following is, I repeat, not a call to violence. It is an observation, and a sincere one:
I am slightly surprised by the fact that more of these people don’t literally end up dead. Especially in the US, where not everyone is playing around, and doing this to the wrong person is not impossible.

In reality, it is clear that the top echelon in the US realizes that it may well be on the receiving end of violence, hence the booming business in panic rooms and bunkers faraway. It’s not clear how much further this trend can go, given how many Americans own guns. Sadly, we look to be on track to finding out.

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20 comments

  1. ambrit

    The main problem with “finding out” about America’s tolerance for corporate malfeasance is that most vigilantism is small scale and not very well thought out. That is why America needs a real Left. A Left with a bloody mindedness not seen since the dynamite campaigns of the turn of the Twentieth Century.
    The above would require a logical and rational ideology from the Left. That would also require a cadre of practical politicians, not just armchair intellectuals.
    Unless there is a well kept secret ‘Left’ movement afoot in America, I suspect that we are in for some serious chaos and anarchy in our near future.

    Reply
    1. WobblyTelomeres

      Global Capitalism must be fought by Global Labor. Otherwise, it is like trying to kill roaches while standing in the corner; they just run somewhere else.

      Perhaps, Trotsky was right?

      Reply
  2. johnf

    I feel silly asking this. Could a modern day retention bonus just be a return maximizing, best practice for running a company into the ground?

    Reply
  3. Lou Mannheim

    perhaps due to personal allegiances

    It’s all a grift. I think what I’m seeing is either a blow-off top or we’re transitioning to a true, government endorsed oligarchy.

    These “ecosystems” that big tech created are too successful. While Apple may not have monopoly power in any one business line, it’s the mindshare and total revenues that are creating enormous wealth and influence for a very small few. And just try extricating yourself from their watchful eyes – very creepy.

    I also don’t know why we seem to be OK with stealing from savers, half of us are risk averse, and this is the economic equivalent of stealing a kid’s lunch money.

    Reply
    1. Anonymous

      I also don’t know why we seem to be OK with stealing from savers, Lou Mannheim

      It’s not OK and HOW it’s done should be changed along ethical lines but an increasing money supply is an ethical necessity to avoid cheating the young and to eliminate free-riding on the risk-taking of others.

      That said, unlimited fiat hoarding is an abuse of a public utility.

      Reply
      1. periol

        “an increasing money supply is an ethical necessity to avoid cheating the young and to eliminate free-riding on the risk-taking of others.”

        I’m going to have to argue that I think there are higher ethical concerns than the ones you listed.

        1. Avoid cheating the young
        2. Eliminate free-riding on the risk-taking of others

        I would argue that our system is specifically unconcerned about whether or not the young are cheated, and has never been.

        I would also like to eliminate free-riding on the risk-taking of others. Why am I and everyone else in America stuck on some grand economic voyage because some rich smug psychopaths takes extreme risks with the oodles of free money the system gives them? Me, I’m risk-averse. I want off this free ride I didn’t sign up for.

        Reply
        1. Lou Mannheim

          “Me, I’m risk-averse.”

          So am I. I’m trying to live on a combination of things and interest is one of them. It’s been 40 damn years of this and I don’t know what to do, but maybe suing the Fed for $50 Trillion would be a fun, if futile, way to start.

          Reply
  4. Marshall Auerback

    This would still be flat-out illegal in Canada. It would constitute a breach of fiduciary duty and likely represent a form of fraud as well. I’m disappointed to hear that Australia has softened up these provisions.

    Reply
  5. a different chris

    >even charitably assuming someone would hire them after their companies collapses underneath them?

    Great post but I have to say somebody often does. It’s a glass floor.

    Reply
  6. Mikel

    “Are we to believe that the stipends these boards approve has any relationship with the market value of these CEOs, even charitably assuming someone would hire them after their companies collapses underneath them? Are we to believe there was no able lieutenant worth a battlefield promotion? No retired industry greybeard who could be engaged for an eighteen month to three year gig? No one in the ranks of turnaround expert or “temp for hire” CEOs who would do?”

    Some of these cases are pure kick-back. Let’s stop kidding ourselves and acting like “values” matter to any of these types. Just do not lie to me.
    Then some of it is more the equivalent of hush money. Think this is the first “looting” or theft by these types? A lot more legal dubiousness occurred at the companies before bailing out these disgusting losers.

    As for the last part of this article, I have never owned a gun in my life and am reconsidering.

    Reply
  7. chuck roast

    When is Capitalism no longer Capitalism, but something else?

    When a Board of Directors functions as invitees at an all-you-can-eat smorgasbord and finishes by eating the waiters and waitresses on the way out?

    When the courts defer to these parasites; permit this activity as a matter of course and sees to it that the bones of the wait staff are picked clean of their pension funds?

    When the Central Bank functions as an enabler and cheerfully guarantees the debt of these parasites?

    When the parasites use the debt proceeds to further pump-up their public equity whose value by now is completely detached from any earnings?

    When the parasites freely migrate back and forth between the Board Room and Government apparatus to ensure that their activities are entirely deregulated and decriminalized?

    When the parasites capture all the organs of information to insure that they are widely seen as Captains of Industry and Social Benefactors?

    When the parasites suborn ostensibly independent tax free organizations to feed their ravenous appetites?

    When the parasites privatize even the most public of institutions like parks and streets?

    So, if it’s no longer Capitalism, do we have a name for it?

    Reply
    1. Dirk77

      If the ideal is impossible, then what gets close is how it really is. So yes, as the Soviet Union and Maoist China were indeed examples of communism, then so what you describe is indeed capitalism.

      Reply
    1. Dirk77

      +1. Sorry you need to report on such things Yves. You deserve better. On another note, I hope your mom is doing ok.

      Reply
  8. EoH

    “But companies are assumed to be operating in good faith.” Is that like the presumption of regularity that courts apply to government actions, say, those of Bill Barr’s DoJ, regardless of evidence that it is no longer warranted? I am skeptical about whether the presumption was ever valid.

    Reply
  9. Ken Murphy

    We’re in a looting phase of the economic cycle. Until the pendulum swings back towards the hard work of real investment then things aren’t going to get any better. Value extraction, not value creation, is the rule of the day. I saw the rot setting in in the 1990s when I worked in commercial banking in NYC, and I saw the cancer metastasizing in the 2000s when I worked in private investment banking.

    Things will continue as they are until they can’t anymore. Then things will change. And hopefully the focus will swing back towards real investment in real value creation.

    Reply
  10. Off The Street

    I do not have faith in the current political regime, across all parties, in Washington, DC to address, let alone acknowledge, the problems. They are beholden to donors, lobbyists and employers of their kith and kin, so can not propose solutions.

    If they could, then there would’ve been some effort to stem the immoral, unethical and criminal behaviors evident in, say, private equity.

    Reply
  11. Ep3

    “ In reality, it is clear that the top echelon in the US realizes that it may well be on the receiving end of violence, hence the booming business in panic rooms and bunkers faraway. It’s not clear how much further this trend can go, given how many Americans own guns. Sadly, we look to be on track to finding out.”

    Yves, look at what the comb-over in chief is doing. He is blaming a lack of a border wall, a chinese virus, black ppl in Detroit, women governors as the sole source of all our problems in the US. He’s redirecting blame. And Americans are falling for this con.

    Reply

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