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The three dimensions to the golden handshake

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Sasha Planting is a seasoned financial journalist and Associate Business Editor at Daily Maverick Business.

In the scheme of things, the recently announced R30.47-million payout to former Absa CEO Daniel Mminele was pocket change in a bank that saw revenue for 2021 increase to R89-billion.

After all, this is a country where in 2001 former SAA CEO Coleman Andrews was paid R250-million to clear out before his contract was up. And where a hapless and hopeless municipal manager can be paid several million to leave his or her job.

What is it about golden handshakes that makes them so unpopular? I was chatting to my friend Zwelakhe Mnguni over at Benguela Global about this and we agreed that there are three dimensions to the golden handshake.

First, from a social and ethical perspective, golden handshakes are unacceptable in light of the desperation and poverty so evident in our society. At that level, it looks like the enrichment of one individual at the expense of shareholders or taxpayers. While important, this is oversimplifying matters and gives little credence to the circumstances surrounding that individual’s departure. Where there is a breakdown in the relationship between a board and its chief executive or between a minister and a chief executive, the future is ominous. In these cases, a high-performing chief executive would expect a high payment to depart peacefully when they have done nothing wrong.  

The second dimension is the legal perspective. Executive employment contracts are often fixed-term-based, with renewals at the board’s discretion. These contracts often have hectic early-termination clauses. So if I start in a new job today and I’m tied in for five years, the contract would say if you terminate me early I should be paid for the balance of the contract.

In Mminele’s case, a conflict with the board forced him to resign prematurely. Absa paid him R5-million in lieu of his 2020 short-term incentive plus R3.25-million for 2021 long-term incentives. It also gave him an ex gratia or damages payment of R16.5-million, plus R4.5-million for the notice period he was supposed to have served. He was also paid R750,000 for accumulated leave and Absa contributed R466,000 to his legal costs. This package in no way covers what he would have earned at Absa had he stayed on. But neither is it stingy. Far from it.

The third perspective is the governance one. Boards are the ones that make executive appointments and if they are not diligent enough, you end up with a disagreement with the CEO. That disagreement is usually what leads to early exits. In the case of Coleman Andrews, there were many disagreements, but his biggest mistake was when he targeted the black-owned airline Sun Air so aggressively that it went out of business, bringing him into conflict with Public Enterprises Minister Jeff Radebe. His argument was that his brief was to make SAA profitable, and he was doing his damndest to do that.

In the case of Peter Moyo and Old Mutual, the issues are just as muddy. The Old Mutual board knew that he was cofounder of NMT Capital, an investment holding company in which Old Mutual held a 20% stake. They knew there was a potential conflict of interest, but felt they could manage that. The result was a monumental clash of egos.

The question that then needs to be asked by shareholders is whether the golden handshake represents a cover-up of their poor appointment decisions or an unavoidable cost to shareholders, as the working relationship has broken down. And if it is the latter, does the fault lie with the board or the CEO?

Sometimes I think it would be useful for boards to disclose the minutes of these discussions – with unrelated information redacted. And should shareholders be asked to ratify these payments? There are no rules in SA that give shareholders the right to reject a golden handshake granted by a board to an outgoing CEO. But I do believe that if a board is going to award a golden handshake that is in excess of 12 months’ salary, shareholders have some rights. First, the board must make full disclosure of the payments being made and why. And second, shareholders should have the right to vote on this. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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