United Airlines’ contempt for customers was on full display in April, when it dragged a passenger from an overbooked plane, bloodying him in the process.
Since then, shares of United Continental Holdings, the airline’s parent, have rebounded smartly, so perhaps investors consider the incident an anomaly.
But those who do may want to check out a lawsuit unfolding in Delaware Chancery Court, one that involves the former chief executive of United and a prime figure in the Bridgegate scandal that has dogged Gov. Chris Christie of New Jersey. The facts of the case reflect a similar disdain for United’s shareholders by the corporate board members who are supposed to serve them.
At the heart of the lawsuit is the refusal by United’s directors to retrieve any of the $28.6 million received by Jeffery A. Smisek, United’s former chief executive, when he was defenestrated in 2015 amid a federal corruption investigation.
You may recall this inquiry: It centered on United’s reinstatement of a money-losing air route between Newark Liberty International Airport and Columbia, S.C. United had canceled the route but re-established it at the behest of David Samson, then the chairman of the Port Authority of New York and New Jersey, who had a vacation home near Columbia.
Mr. Samson, whose position gave him great sway over Newark Airport, wanted access to convenient flights to his second home. He had threatened to bar United from building a crucial hangar on-site if it did not start flying to Columbia.
Mr. Smisek approved the restoration of the route “outside of United’s normal processes,” federal investigators said. The same day, the Port Authority approved the airline’s hangar project.
These charming details came out during the so-called Bridgegate scandal of 2013, when New Jersey officials with ties to Mr. Christie closed lanes leading to the George Washington Bridge, causing traffic jams apparently designed as political payback. In 2014, Mr. Samson resigned from the Port Authority; days later, United halted the Newark-Columbia route, which had lost the company almost $1 million, Securities and Exchange Commission documents show.
But that was not the end of the story. In early 2015, United received grand jury subpoenas from the United States attorney in New Jersey demanding information about the scheme to create the route known as “the chairman’s flight.” The company began its own investigation and fired three of United’s top executives that September.
What might otherwise have been a hard landing for these managers was cushioned significantly by their severance packages. Mr. Smisek received a separation payment of almost $5 million and restricted stock and other awards. The package totaled $28.6 million, according to court documents.
After the executives’ departure, the federal inquiries into United continued. The company cooperated, and in 2016 struck a nonprosecution agreement with the Justice Department. It paid $2.25 million in penalties and agreed to enhance its ethics and compliance procedures.
The S.E.C. joined in, contending that United had violated internal controls requirements and that its books and records did not accurately depict the decision-making process surrounding the route reinstatement. United paid $2.4 million to settle with the S.E.C.
Last March, after pleading guilty to a felony of pressuring United executives, Mr. Samson, a former New Jersey attorney general, paid a $100,000 fine and was ordered to one year’s confinement, which he is spending in that South Carolina country estate. Mr. Smisek was not personally charged with wrongdoing.
These tawdry events have disturbed at least one of United’s institutional shareholders: the City of Tamarac, Fla., Firefighters Pension Trust Fund. In a litigation demand, it requested that the company’s board claw back the severance pay given to the executives who took part in the bribery scandal. By doing so, United’s board would correct its breach of fiduciary duty and prevent “the unjust enrichment” of company executives.
Seems fair enough. But United’s board has refused. Its justification for not recouping the pay is, well, pretty rich.
In a letter to the pension fund, a lawyer for United explained that it would harm the company to give the board “unfettered discretion to recoup compensation” in cases involving wrongdoing. “Where such discretion is out of step with industry norms,” the letter said, it would “make it difficult for United to recruit and retain top talent, particularly at the senior management level.”
In other words, clawing back severance awarded to executives amid a bribery investigation is not industry practice. And if United pursued such a recovery, the airline would be an outlier and unable to hire good people.
I wanted to speak about this remarkable clawback stance with a member of United’s board. A company spokeswoman declined my request; because of the litigation, she said, no one at United or its board would comment beyond noting that the company believes the shareholder’s complaint has no merit.
A lawyer for Mr. Smisek did not respond to an email request seeking comment.
United’s response is telling. After all, recovering executive pay in situations involving wrongdoing is an important accountability mechanism. Boards should be eager to claw back compensation earned under such circumstances, if only to send a message to other employees.
Indeed, it is among the most basic of their duties: Company directors must ensure that the entities they oversee operate in the best interests of their investors. According to the fiduciaries of the firefighters of Tamarac, board members at United Continental have failed at this task.
Companies often boast to shareholders about their robust pay-recovery policies. But saying and doing are two different things; boards typically have great leeway in determining when a clawback occurs.
And corporate recoupment policies often apply very narrowly. United’s most recent proxy statement, for example, says that compensation is subject to clawbacks “in certain financial restatement situations.”
This is similar to the S.E.C.’s approach to pay recoveries. The agency often, but not always, recoups compensation in cases involving accounting misconduct.
The firefighters’ pension fund contends that by paying the severance packages, United’s directors “diverted corporate assets for improper and unnecessary purposes.”
Gustavo F. Bruckner, a lawyer at Pomerantz L.L.P. in New York who represents the pension, said: “Faced with egregious executive behavior, directors should at minimum claw back bonuses. Not to do so sends the message that there is impunity for improper behavior at the top.”
Who are the directors at United Continental Holdings? There is one boldfaced name in the group: Walter Isaacson, the best-selling author and head of the Aspen Institute.
Others are:
• Carolyn Corvi, a former Boeing executive;
• Jane Garvey, head of Meridiam, North America, an infrastructure development fund;
• Barney Harford, a former executive at Orbitz Worldwide, an online travel company;
• Todd M. Insler, master executive council chairman of the Air Line Pilots Association;
• James A. C. Kennedy, former chief executive of T. Rowe Price group, the mutual fund company;
• Robert A. Milton, former head of Air Canada’s holding company;
• Oscar Munoz, United’s current chief executive (who will not be promoted to chairman as a result of the passenger-dragging episode);
• William R. Nuti, chief executive of NCR Corporation, the A.T.M. manufacturer;
• Sito Pantoja, general vice president of the International Association of Machinists and Aerospace Workers, Transportation Department;
• Edward M. Philip, chief operating officer of Partners in Health, a nonprofit health care entity;
• Edward L. Shapiro, retired managing partner of PAR, an investment management firm;
• Laurence E. Simmons, chairman of SCF Partners, a private equity firm;
• David J. Vitale, chairman of the Urban Partnership Bank; and
• James M. Whitehurst, chief executive of Red Hat Inc., a technology company.
It’s great that the pension fund has stepped up to this challenge. But it’s a shame that shareholders must resort to litigation to compel directors to do what’s right. Alas, the United case is one more indication that when executive pay is involved, boards giveth mightily but almost never taketh away.
