Apparently, about $1 million if you are the CEO of Johnson Controls, Inc. At least, that is one possible takeaway from the action of the board of directors of Johnson Controls with respect to the behavior of its CEO, Alex Molinaroli. According to the Company’s 2014 proxy statement, Mr. Molinaroli’s annual bonus for fiscal year 2014 was reduced by 20 percent as a consequence of his actions in connection with an extramarital affair.
The short story is that Mr. Molinaroli and his wife of 28 years were apparently having marital difficulties. Mr. Molinaroli began an affair with the principal of a consulting firm that had a long-standing relationship with Johnson Controls. According to published reports, Mr. Molinaroli’s wife found out and reacted in a very public way. The executive committee of the board (sans Mr. Molinaroli) undertook an investigation, which resulted in Mr. Molinari being cleared of any actual wrongdoing, such as misuse of funds or improper influence. It was determined, however, that Mr. Molinaroli “failed to comply with the Company’s Ethics Policy, which required Mr. Molinaroli to timely alert the Audit Committee to a situation that could be perceived to raise issues of conflict of interest.” The consulting relationship was terminated, and, reportedly, so was the affair. Nonetheless, the board expressed its continuing faith in the leadership of Mr. Molinaroli, who had been with the company for 30 years and was promoted to CEO at the start of 2014.
What’s a board to do?
Companies have a right to expect their employees to behave ethically and to advance the interests of the business, and Johnson Controls has a reputation for maintaining high ethical standards. The difficulty in situations where there is some sort of high-profile misbehavior, particularly of a prurient nature, by a company’s chief is that the behavior almost never rises to the level of “cause” under the executive’s employment agreement. Even if it did, one has to wonder whether the board of a public company would be wise to go through what is likely to be a public dispute over whether cause exists. Some stones are better left unturned after all. Therefore, the departing executive often gets a large severance package from the public company. Johnson Controls’ approach is interesting—and smart. The company gets to keep a CEO with long-standing service, does not pay severance, and avoids the upheaval of a sudden and unanticipated loss of leadership, but it still penalizes an ethical violation through the use of the compensation committee’s power of the purse. All’s well that ends well, right? Not so fast . . . .
What’s a CEO to do?
As Emily Dickinson wrote, “The heart wants what the heart wants—or else it does not care.” True words, but what room does that leave for a CEO infelicitously struck by Cupid’s arrow? Not much. It is difficult to see how Mr. Molinari, or anyone in a similar situation, could be expected to comply with the requirement to disclose an affair that could raise conflict–of-interest issues. After all, affairs are, by their very nature, secretive. That leaves two choices: do not have the affair (but see Ms. Dickinson’s viewpoint) or pay the price for love. Human nature being what it is, the latter is likely to be the choice every time. The only question is, What price love?