'Morals clauses' usually limited to illegal acts for executives

8/13/2008

The chief executive of a tech company resigns under pressure in a scandal over $240,000 in charges on his company credit card at a New York strip club.

Harry Stonecipher, 68-year-old former head of aircraft-maker Boeing Corp. is forced out over an affair with another company executive.

Straightforward examples of contract morals clauses doing their job, right?

Not necessarily, according to lawyers and corporate experts.

Not all contracts contain moral clauses, they say. And those that do often address only examples of "moral turpitude" that violate laws.

That is the case at Owens-Illinois Inc., Perrysburg, and Dana Holding Corp., Toledo, which have hired chief executive officers recently.

At Dana, CEO Gary Convis can be fired with "cause" for "the conviction - or plea of no contest for any felony or the indictment for any felony, including without limitation any felony involving fraud, moral turpitude, embezzlement or theft."

Also grounds for firing at Dana: "Alcohol or prescription or other drug abuse substantially affecting work performance."

Al Stroucken, head of O-I, works under an agreement stating that he can be fired for "your conviction - or a plea of (no contest) - for a felony; or a crime involving fraud, dishonesty, or moral turpitude."

The issue of "morals clauses" surfaced in the controversy over James Hartung, whom the Toledo-Lucas County Port Authority board of directors fired recently.

He was accused of having an extramarital relationship with an agency vendor, although the exact circumstances of the dismissal are unclear.

During the controversy, it was discovered that his contract contained no substantial morals clause.

That isn't unusual, in the view of Marvin Robon, a longtime Toledo attorney specializing in business matters.

"I seldom run across it," he said.

Most contracts stipulate dismissal for serious crimes such as soliciting sex from a minor and major drug abuse, he noted.

Separate policies typically address serious workplace infractions such as sexual harassment.

When an executive is having an affair with someone other than a subordinate, supplier, or others connected to the company, it might be cause for a round of tsk-tsks. But it is not typically grounds for disciplinary action, Mr. Robon added.

In the Boeing situation, the problem was that Mr. Stonecipher's mistress was a fellow employee, possibly a subordinate, said Ronald Berenbeim, principal researcher at the nonprofit business group the Conference Board.

The issue was addressed not under a morals clause in his contract but under a company code of conduct that Mr. Stonecipher had instituted.

"The issue is whether the conduct puts the company at risk for any reason at all," said Mr. Berenbeim.

"Clearly, it would if the person with whom the executive was having an affair was a fellow employee or a supplier."

Rather than making moral judgments, company executives act because the conduct could put the firm at risk of lawsuits and other problems, he said. "They're not making moral judgments."

"References to morals tend to be unusual," explained Paul Hodgson, who studies executive contracts as a senior research associate at the Corporate Library, an East Coast firm that focuses on corporate governance issues.

Typically, contracts stipulating dismissal for immorality specify that the infractions be a felony.

Morals clauses are more common in endorsement deals with celebrities, experts said. The clauses allow cancellation of the contract if the celebrity engages in morally offensive conduct or damages the sponsor's reputation.

John Finerty Jr., a lawyer in Milwaukee who has written about morals clauses, predicts that more executives will be subjected to such clauses.

High-profile cases like that of Dennis Kozlowski, the onetime head of Tyco International who spent company funds on gold bathroom fixtures and lavish entertaining, have helped focus attention on the impact top-executive misbehavior.

"Typically, if you've got somebody who is stealing from the company there may be an underlying issue, whether it is funding a drug habit or paying for a girlfriend or boyfriend on the side," Mr. Finerty said.

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.