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The delicate business of dismissing a chief executive

04 September 2009

Senior executives in New Zealand can be lawfully dismissed only with great difficulty since the (now repealed) Employment Contracts Act 1991 extended to them the same fair process rights that are enjoyed by all workers.

The problems arise because legal grounds for dismissal are hard to establish at senior or CEO level.  Most employment agreements say something like “Either party can end this agreement by giving x months notice”.  However, that is simply not the case.  Under New Zealand’s personal grievance laws, an employer needs to have a justifiable reason for terminating the relationship, and must have followed due process.

Justifiable reasons are redundancy, misconduct, poor performance, or incapacity (ongoing sickness).  However, the reasons leading to an executive’s departure will not always fit neatly into one of those categories.  Often, the issue can be about relationships (with the Board, or other senior managers), or perhaps it may just be a question of fit and style. 

In general, redundancy or misconduct is not relevant.  Therefore the company is usually left with having to show poor performance.

The problem is that it is very difficult (and often impossible) for an employer to follow the process required to dismiss for poor performance.  The employer must show that the senior executive has been given clear warnings and sufficient time to improve; read three to six months. 

Few businesses (if any) can contemplate leaving issues unresolved for this length of time. It can also be hard to prove that the employee’s performance is the problem (as opposed to say market conditions or the actions of other staff, or the Board). 

So what happens?  Generally, the employer and the executive will do a deal.  To achieve this, an employer looking for an exit arrangement has several options, but each is fraught with risk.

The simplest approach is to have a one on one discussion (usually between the chairman and the CEO) along the lines of “it’s not working out.”  If the relationship is reasonable, this is often enough.  New Zealand is a small market, and most chief executives will prefer a sensible exit package to a public fight. 

But it is much harder where trust and respect has broken down and where the CEO (for whatever reason) is considering legal action.  This is because such a discussion will generally amount to a constructive dismissal (meaning the employer does something amounting to a dismissal, without actually intending to terminate employment). 

In theory, it is fine for an employer to tell an employee that he or she needs to improve, and that disciplinary action may result if reasonable improvement is not achieved (although the employer’s expectations have to be realistic).  However, a company steps over the line when it tells the executive that he or she has not got what it takes, or that the Board has irrevocably lost confidence.  And usually, that is exactly the message the chairman is trying to deliver.

The other problem with informal discussions is that the message given is not always the same as the message heard.  “She said”/“he said” disputes are frequent.

A common myth is that this discussion can be “off the record” and “without prejudice”.  Generally, it isn’t.  These sorts of communications are only protected by privilege where there is a genuine offer to settle a “dispute”.  At this stage, there is no legal dispute.

At the other extreme, the company may try and precipitate a negotiated exit by initiating a formal disciplinary process.  This will generally keep the company within the bounds of the law.  However, it is often interpreted as aggressive, and the employee occasionally responds by seeing the disciplinary process through to completion. 

Normally, a middle course will be preferable.  For example, the chairman might signal the possibility of a formal performance review, while making it clear that the outcome is not pre-determined.  They will also invite the executive to think about other possibilities before the disciplinary process (with its potentially adverse results) commences. 

In strict terms, this sort of conversation is usually “legal,” but in practice there is a real chance that the employee will interpret the approach as a clear signal he or she is going to be managed out, and may still threaten or bring a constructive dismissal claim.

Another option, becoming more popular, is for the company to initiate an early mediation.  This can be very effective and efficient.  Having a neutral third party to facilitate resolution is generally very helpful, and the parties can be completely up front, because they are in a without prejudice and confidential environment.  At CEO level, the mediator will usually be private.

Can all this be avoided?  There are certainly ways of drafting the initial employment agreement to minimise the likelihood of being caught in this dilemma.   However, as the law currently stands there are no silver bullets or watertight solutions, because even the most sought after and highly paid chief executive cannot contract away their right to bring a grievance. 

One approach is to agree a no-fault termination payment at the beginning.  However, like other potential solutions, this approach is not perfect.  These clauses are not enforceable, and (where things go badly wrong) they can end up operating as a minimum payment, which the executive then tries to increase.

Our thanks to Geoff Bevan for writing this article, which first appeared in the September issue of Boardroom magazine.

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