When a CEO goes rogue
The recent scandals surrounding the chief executives of WiseTech Global and MinRes have put the issue of CEO behaviour on the agenda and raised questions about what if any recourse shareholders have.
Shareholders don't have any direct influence on a CEO's future, regardless of what they've done.
Instead, it's the job of a company's board of directors to hold a chief executive accountable for their behaviour.
How CEOS are held accountable
"The board's job is to appoint CEOs, to remove CEOs, to hold them to account on the performance of the business and to ensure that the CEO is doing the right things in the best interests of the business and the shareholders," says Megan Motto, CEO of Governance Institute of Australia.
Along with the financial performance of the company, directors would consider non-financial issues, such as data breaches or reputational damage.
While they have no direct influence, shareholders elect the board, which gives them tacit influence.
They can also raise issues at annual general meetings and vote against the company's remuneration report, which sets out how it pays directors and senior executives.
Shareholders use the vote against the rem report to express their dissatisfaction about a company's performance such as they did in November last year, when 83% of shareholders voted against the Qantas remuneration report.
The two recent CEO scandals each involve different issues.
The MinRes CEO scandal
At mining company Mineral Resources, the scandal involves revelations that founder and chief executive Chris Ellison allegedly ran a tax evasion scheme for a decade.
Ellison, former chairman Peter Wade and three other founding executives allegedly realised $7 million in profits in the three years after MinRes floated in 2006 by using a company incorporated in the British Virgin Islands to sell machinery to the mining company at inflated prices. MinRes then claimed tax deductions that it wasn't entitled to.
MinRes shares fell sharply following the revelations.
The board is investigating the claims.
In the meantime, news this week of a deal with Gina Rinehart to buy some oil and gas projects from MinRes for $1.13 billion has helped the share price recover somewhat.
The WiseTech CEO scandal
At WiseTech, founder and chief executive Richard White has been accused of bullying and inappropriate conduct.
A media investigation revealed White paid for a multi-million dollar house for an employee who he had been in a relationship with, that he was selling millions of WiseTech shares to pay his ex-wife, and that had been accused by an outgoing director of intimidation, bullying and overseeing poor corporate governance.
Shares in the company fell from above $133 to under $100, reversing much of the company's rapid share price gains.
It is notable that both scandals were uncovered by the media and not revealed by the companies themselves.
WiseTech shares rebounded somewhat after White resigned.
When a CEO's position is untenable
Motto says the departure of a CEO can play out in different ways, but will usually start with a conversation between the board and the beleaguered chief executive about what's in the best interests of the corporation.
"Sometimes that will be board-initiated and sometimes it might be CEO-initiated, but there's no hard and fast rule," she says.
And Motto points out that shareholders can vote with their feet, by selling their shares.
But doing so might incur a loss, in which case there is always the option of joining a class action lawsuit.
Securities class actions in Australia are generally launched because of a breach of continuous disclosure regulations, which require companies to release information which could affect the share price in a timely manner.
The class actions typically involve situations where executives and the board sat on bad news such as a profit downgrade - such as the successful class action against Myer, where shareholders argued they made a loss because they would have sold their shares had they known all the information.
However, Damian Scattini, a Sydney-based class actions partner at global law firm Quinn Emanuel, says they could also cover poor behaviour by the chief executive.
"No one cares if the CEO on the weekend likes to go train spotting or go to nudist beaches or whatever, it doesn't matter," he says.
"But if what they are doing has the potential to jeopardize the business of the company, either through its reputation or through upsetting all the corporate covenants, or anything really, that would be material to the market."
Under such a circumstance, if the company board knew about the behaviour and its potential to affect the share price, but didn't inform the market, then they might have breached the continuous disclosure obligations.
Such class actions wouldn't rely on the perceived morality or immorality of the CEO's actions, only whether the actions could affect the share price.
Commenting on the likelihood of class actions against some of the companies that have been in the news recently, Scattini says: "I would be astounded if people aren't measuring up some of the companies that have had recent CEO problems."
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