The CEO’s Shadow Account

There have been intermittent stories about the firing of Robert O’Connell, the CEO of MassMutual, an old New England company. Although Mr. O’Connell really did a good job for the company (revenue was up 50% and shareholders’ equity by 62% in the five years he ran the company), he was sacked in June. Based on an article this week in the Wall Street Journal, there were a couple of reasons for letting him go: a possible affair with a subordinate, nepotism, the usual ‘management style’ and, the most interesting to me, misuse of his shadow account. Shadow accounts appear to be a fairly common 'perk' among large company CEOs.

What, you may ask, is a shadow account? Well, it’s another perquisite of being a CEO of a big company. When O’Connell started with MassMutual, he was awarded $4,100,000 in a ‘funny money’ investment account, referred to as a shadow retirement account. I say ‘funny money’ because no money actually changed hands; it was like monopoly money. Except in this case - as with other CEOs - the company would pay him the real money value of this account when he retired.

The real money value of the account would change as Mr. O’Connell made hypothetical trades. He was able to convert his original kitty of just over four mil to $30,600,000 by March of this year. Had he invested in the Dow Jones, his kitty would have grown to ‘only’ $5,500,000. How did he do so well? Basically, by cheating and by the lack of any real supervision of the account by the company.

The people who signed off on the account were Mr. O’Connell’s subordinates and really did not review his hypothetical trades and understandably so. This wasn’t enough for O’Connell. Although he was restricted to ‘trading’ in either of 15 mutual funds or Dow Jones stocks, he ‘invested’ in IPOs of such household names as CoSine Communications, Inc. Not only did he invest in unauthorized securities, he took advantage of the hypothetical nature of his trades by investing early in the morning at the previous day’s closing price; so he could take advantage of any after hours news.

Being CEO of a large public American company is still the best job in the world. You can be incompetent. You can cheat. You can be a thief. You’ll still walk away with millions.