Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP Executive Officer Departures: Is your Disclosure Adequate? | 32 If the former, most companies and practitioners would likely agree with the dissenting Commissioners. Certainly, it is not the case that a company is required to terminate an employee for cause where a provision in a plan or agreement provides the company the ability to reduce or eliminate benefits in the event an employee is terminated for cause. Terminations necessarily involve an element of discretion and, to that end, boards and companies retain the discretion to determine the characterization of a termination and how it impacts a specific plan or agreement. Retention of this discretion is critical to enable flexibility, mitigate the risk of litigation that can arise from a for cause termination, including the risk of defamation claims, obtain a release of claims or agreement to new restrictive covenants from the executive officer, both of which require the payment of consideration, and consider the potential distraction to the company that may result from a prolonged investigation of an executive officer preceding termination (which is often required to effectuate a for cause termination). Up until now, the Exchange Act's compensation disclosure regime has not been used to provide the SEC with the ability to require the explanation of the decision of a board or company regarding how to characterize a termination through the disclosure of the details of their decision-making processes or defend their characterization of an executive officer's termination. Requiring this disclosure would necessitate, in certain cases, disclosure of sensitive and confidential information. In contrast, failing to disclose the decision to pay benefits to an executive officer being terminated for cause under the company's plans that would not be payable in the event of a termination for cause would generally be considered a required disclosure under Item 5.02(e), as the provision of such payments upon a termination for cause would not be materially consistent with previous disclosures. Furthermore, it would generally not be considered accurate to describe an executive officer as having a preexisting entitlement to benefits payable only upon a termination without cause if, in fact, the executive officer was terminated for cause. Companies should be cautious in reading the McDonald's order as the sea change that some have suggested it is. Rather, it may be more appropriate to read the order to emphasize the importance of consistent and clear disclosures in the context of executive officer terminations. ISS Position on Severance Disclosures Considerations regarding a company's approach to the disclosure of executive officer terminations and severance go beyond the attention given by the SEC. It is the position of ISS that the payment of severance in connection with a voluntary resignation or retirement is a "problematic pay practice" that carries significant weight and may result in an adverse director vote recommendation. To that end, ISS advises that companies should not simply state that an executive officer "stepped down" or that the exit was "mutually agreed," as this does not adequately indicate whether the termination was in fact involuntary. This position can be at odds with the sensitivity and nuance in the characterization of executive officer terminations, causing companies to regularly weigh the risk of a negative vote recommendation from ISS against what the company thinks is the appropriate characterization of the termination.