July 6, 2018 at 9:52 AM
Barnes & Noble's announcement on Tuesday that its CEO, Demos Parneros, was being terminated, gave investors some important information: He would not get a severance. His firing was not related to "any potential fraud." He had violated a company policy and would no longer be a company director.
But one key piece of information the announcement didn't share was what policy he violated. Coming less than two weeks after Intel disclosed that its CEO, Brian Krzanich, resigned after violating the chipmaker's anti-fraternization policy -- the company had learned of a "past consensual relationship" with an employee -- it raises a question. How much detail must companies share when a CEO is asked to leave?
The answer: Not as much as you might think. Within four business days of making the decision, companies must issue a securities filing called an 8-K if a material corporate event occurs, and the departure of a chief executive certainly qualifies. It must include that the fact that the CEO is leaving, what kind of related agreements result from that departure (such as severance pay) and if the CEO is also a director -- which a CEO almost always is -- whether the departure is the result of a disagreement on "operations, policies or procedures."
While the Securities and Exchange Commission does require a "brief description of circumstances" if a director is removed "for cause" or has a disagreement with the company, it does not detail how specific that description must be. In the past, the SEC proposed requiring disclosure for reasons for an executive officer's departure, but eliminated that proposal in 2004 after hearing concerns.
"What's expected is you're just going to say they left," said Charles Elson, director of a corporate governance center at the University of Delaware. Plenty is "left up to the company's discretion."
In the case of Barnes & Noble, the company does say in the announcement that Parneros was terminated for "violations of the company's policies," but is careful to note it is "not due to any disagreement with the company regarding its financial reporting, policies or practices or any potential fraud relating thereto." Whether the violations in question were about nepotism, conflicts of interest, sexual harassment or some other unknown policy is unclear from the announcement. In an email, a Barnes & Noble spokeswoman declined to comment further.
Elson said some companies try to share less information to give them more flexibility in case a CEO tries to litigate a "for cause" exit or the elimination of a severance.
And while statements cannot be misleading, according to one securities law expert, companies sometimes share less because an investigation is ongoing and they don't have all the facts, or out of privacy concerns for the CEO or his family. "The SEC is not trying to write rules on what people have to say in press releases," said this expert, who was granted anonymity to speak freely in case of possible client conflicts at his firm.
Still, when companies provide murky details, the strategy can backfire -- or stay in the news for months. Back in 2010, former HP CEO Mark Hurd abruptly resigned after what had been widely seen as a successful turnaround. The company said in its announcement that the decision was made after an investigation surrounding a claim of sexual harassment against Hurd and HP by a former contractor; it said the investigation found no violation of HP's sexual harassment policy but did find unspecified violations of HP's business conduct standards.
The company soon said those conduct issues had to do with things like inaccurate expense reports, but months later the story was still in the headlines, as reporters dug into Hurd's relationship with the contractor and further detail was released.
"It will always come out," Elson said. "You'll figure it out eventually."