HOW TO TREAT CEO’S: THE WAY THINGS OUGHT TO BE

Last week I read that Michael Mendes formally resigned from Diamond Foods Inc. Mendes worked for Diamond most of his working life, serving as President and CEO  from 1997 and adding the title of Chairman in 2010. Then at the beginning of 2012 he was placed on administrative leave after an accounting impropriety was discovered involving payments to walnut growers, which artificially inflated financial results of the company.

 

The shift in payments must have been whoppers because they necessitated the restatement of 2010 and 2011 profits. As a result it appears that Diamond has lost its deal to purchase the Pringles brand from P&G, which was to have been an all stock transaction

 

It is not uncommon for companies to manipulate numbers to look good. It is also not a surprise to find that those at the top may not have been in the know. As a result of such an “event” a CEO will clean house, heads will roll and internal accounting measures tightened. But here it look like the perpetrators may have been those at the very top, including Steven Neil, the former CFO, who was also placed on leave. Why else would Mendes and Neil have been placed on administrative leave? Why else would Mendes repay $2.7 million in bonuses he received for 2010 and 2011, and return shares awarded to him in 2010. He leaves with a net retirement balance after repayment of bonuses, and will not be granted any severance.

 

In his wake, Diamond Foods is stuck with a share price that has plummeted 60%, a lot of angry shareholders who are ratcheting up class action suits against the company, and ongoing Department of Justice and SEC investigations. That’s quite a trail to leave behind.

 

The Board should be commended. In the face of a serious crisis it took decisive action. There was no attempt to white-wash the situation or cover for Mendes. Crisis management oftentimes means nothing more than biting the bullet and facing problems head-on. In this case the Board has taken steps to tighten its internal controls and has cleaned house. But in my view it has done more than that. Too often the guy who screws up, especially if he is at the top, gets a golden parachute and a pat on the backside to ensure that the door doesn’t hit him on the way out. The wheels are greased and everyone thinks the right thing is being done. But this Board obviously saw no need to reward people who created the crisis in the first place. Hopefully this Board will set a precedent for the many situations which will undoubtedly follow in the business world.

 

CEO’s should pay a price when they do something illegal, or in violation of a company’s  ethical standards. All companies should take a page from this playbook. Don’t deplete the assets of your company even more after a crisis by rewarding bad behavior. It adds insult to injury to your shareholders and other stakeholders. CEO’s and others in top management need to receive what they deserve. If they earn a walk out the door, they are not entitled to a fat paycheck. It’s one thing if the chemistry isn’t right or the results are disappointing. It’s another thing if a person has left his company high and dry, bleeding from bad decisions and actions that have done harm. It’s time to change the ugly unwritten understanding between boards and their managements that says that the upper echelon is a fraternity whose members are entitled to hop from company to company accumulating prizes while their reputations remain unscathed, regardless of their perfidy or incompetence.

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