CEO Sells Shares Just Before Departure; New Employer Cancels Appointment

In early September 2019, Dutch telecoms firm KPN announced the appointment of Dominique Leroy as new CEO, to start in December. Leroy had been in charge of Belgian telecoms company Proximus for five years but sought a new challenge.

However, later that month, news broke out that Leroy had sold some of her Proximus shares in August, just a month before her departure. While she hadn’t yet made a firm decision to leave, she had already started discussions about moving to pastures new. In a statement released on Proximus’s website, she said “At that moment I had not decided to leave Proximus. I was in discussion about the renewal of my contract with Proximus and had some conversations with several external parties, amongst which KPN.”

As argued in Chapter 5, selling shares just before a CEO leaves is bad practice. It gives incentives to pump up the short-term stock price before her departure (perhaps by cutting investment), to maximise the price at which she can cash out. Even if she doesn’t undertake bad actions (errors of commission), knowing that she can cash out may reduce the incentives to undertake good actions if their payoffs won’t arise until long after her departure (errors of omission). For example, she may not bother to invest in employee welfare or skills development. Instead, Chapter 5 argues that CEOs should be required to hold a substantial chunk of equity after they depart, to ensure that their horizon extends beyond their tenure.

This example also highlights the importance of the structure of pay rather than the level. Proximus’s board had succeeded in holding down pay levels (Leroy was paid €1 million, low for a CEO of such a large company) but perhaps didn’t focus enough on the horizon of pay.

In an intriguing coda, KPN withdrew their job offer in late November. The official reason was that Leroy was being investigated by Belgian authorities for insider trading, and that KPN didn’t want to have a CEO who was distracted by such an investigation. This is certainly a plausible reason. It may also be that KPN decided against a CEO with a history of cashing out rather than thinking for the long-term.

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