By David F. Larcker and Brian Tayan *

(exechange) — November 2, 2020 — Rarely are CEOs fired outright — only 14% of the time, according to exechange. Most of these involve termination for performance.

However, sometimes CEOs are fired for misbehavior: expense abuse, lying to the board, affairs, harassment, etc. Why is it that, even when these occur, CEOs can still walk away with millions?

Exechange data shows terminations for misconduct constitute 2% of CEO departures. We analyzed these cases and found the CEO received severance one-third of the time.

Examples include a CEO who engaged in activities “contrary to expense-related policies;” a CEO who engaged in a “personal relationship;” and another due to “misjudgment handling an employee matter.”

The most prominent was former McDonald’s CEO Steve Easterbrook, terminated over an employee relationship. The board initially fired him without cause, entitling him to continued salary and benefits, pro rata bonus, and the retention of equity awards. Later, the board learned of more relationships and sued him to recoup $57 million.

The determination to pay severance depends on whether a termination is for or without cause. For cause involves willfully failing to perform duties or engaging in misconduct, and the terms are spelled out in the employment agreement.

Still, the board must decide how strictly to enforce these terms. In doing so, they reveal their allegiance. Does the board side with shareholders whom they represent, or with a CEO fired for grave misjudgment? The answer tells us something about governance at the company.

* The authors are a professor and researcher at the Rock Center for Corporate Governance, Stanford University.

Editor’s note: This is a guest post.