The promise of a private-equity payout is mighty tempting for corporate executives. Often, they reap windfalls from the vesting of their options. And the new owners of their companies usually offer managers big slugs of stock to get them to stick around. In Dow Chemical’s case, such lucrative prospects might have been a bit too tempting for a couple of its executives.
The company yesterday fired a director, J. Pedro Reinhard, and Romeo Kreinberg, who headed its performance plastics division. The reason: shopping the $44 billion (Rs1,89,200 crore) company without authorization from the board. Though neither was available to comment, it’s clear from their titles that investment banking wasn’t part of their job descriptions. But this may also be a case of the wrong people doing the right thing.
In theory, companies are right to give the heave-ho to executives engaging in vigilante corporate strategy. It would be dysfunctional to have directors or executives circumventing the board and the chief executive. But that’s especially true in a potential leveraged buyout, where the interests of executives can differ dramatically from those of shareholders.
An executive may, for example, try to drive his employer into the hands of a buyer to reap lucrative change of control payments and accelerate the vesting of options—even if other factors, such as the state of the economic cycle, mean shareholders would be better served by being patient. Moreover, the best price is usually achieved through a competitive auction.
Still, one can’t help but wonder whether Dow’s alleged buyout rogues were onto something. Investors in oil-rich regions such as the Persian Gulf are awash in cash and looking to find investments in sectors they understand, such as petrochemicals. Given this, it’s not inconceivable that Dow could attract a knockout bid. But exploring such an option is a decision for Dow’s board—not its functionaries.