Divorce, Executive Style
When Robert I. Goldman, chief executive officer of Congress Financial Corp., filed for divorce from his wife, Vira, in 1996, he had good reason to expect the lion's share of their $100 million estate. After all, even the judge agreed that "Goldman's career was nothing short of spectacular." He became CEO of Congress (now a unit of First Union Corp.) in 1968, five years after his marriage. By 1996, he was earning $6.4 million a year and had $88.2 million in Congress stock. Meanwhile, New York State judge Walter B. Tolub Jr. observed, "Mrs. Goldman became the proverbial housewife." After becoming pregnant in 1966, she says she stopped teaching and spent the next three decades raising their daughter Olexa, cooking Robert's meals, following him into fitting rooms to make sure his suits looked good, and assembling a $2.5 million collection of antiques to stuff in their townhouse on New York's Sutton Place. "I was there for him 200% every step of the way," says Vira.
But if the Goldmans' marriage was traditional, their divorce was anything but. In the past, settlements involving the super-rich generally favored the spouse earning the most money. That was most often the man, who could usually count on keeping at least two-thirds of the couple's joint assets--and sometimes more. But in a stunning Apr. 22 decision, Tolub ruled that Vira Hladun-Goldmann (as she is now known) was entitled to 50% of the pie, including $44 million in restricted Congress stock that the company was obligated to buy back. It was the largest courtroom divorce award in New York history. "In a long-term marriage," Tolub decreed, "the distribution of marital property should be equal or as close to equal as possible."
Welcome to the New Executive Divorce. Powerful cultural, legal, and economic forces are combining to make terminating a marriage more expensive than ever--especially for high-ranking, well-compensated businesspeople. And that, in turn, is making the whole process of divorce, never pleasant to begin with, much uglier. Husbands are squirreling their money away in secret Caribbean trusts, wives are accusing their exes of abuse, and lawyers are walking off with seven-figure fees.
The new nastiness first gained national attention last year when Lorna Wendt won $20 million from her husband Gary, the CEO of GE Capital. But the Wendt case is part of a much broader revolution affecting executives throughout upper management. For starters, divorce among executives is on the increase, according to a poll by the American Academy of Matrimonial Lawyers--in part because it has lost its stigma among the business elite. And as divorce becomes more prevalent in executive circles, the higher-than-ever stakes and lower-than-ever tactics are increasingly becoming a business issue. When their marriages draw to an end, executives are increasingly facing the prospect of handing their angry spouses large equity stakes in their businesses, sensitive competitive information, and even board seats.
STICKY SITUATIONS. Consider the bitter divorce between cell-phone pioneer Craig McCaw and his wife, Wendy, a publicity-shy environmentalist who, according to trial documents, ran up monthly bills of $190,000 to support her lifestyle. During proceedings that began in 1995, a court order severely crimped Craig's business dealings by prohibiting him from making any major sale of his personal assets, then valued at $1.3 billion. Although the restriction was later lifted, he ultimately gave Wendy stock in his companies, Nextel Communications and NextLink, now worth $663 million. She recently flexed her muscle by choosing a Nextlink board member. And now News Corp. Chairman Rupert Murdoch faces a similar possibility. On July 21, his wife, Anna Murdoch, a News Corp. board member, filed for divorce, which could force the tycoon to part with a portion of his controlling stake in the company.
To avoid such sticky situations, more and more boards are being forced these days to think about divorce--once a purely personal issue that rarely arose in business discussions. As stock options, for example, become a more common form of executive compensation, judges are now routinely divvying them up, often dragging companies into court to come up with fair valuations. So companies are scrambling to protect employees by deferring options and other compensation until after the divorce is final. Other businesses, meanwhile, are drawing up contracts forcing spouses to waive their interests in the mate's business. "I'm talking with corporate lawyers all the time about structuring agreements [to prevent] a company's shares from being taken by a spouse in divorce," says Philadelphia family-law attorney David N. Hofstein.
In spite of all the progress women have made in the workplace, the roles in this drama are still distressingly familiar. Generally, the one who made the big money is the husband and the one who is fighting to get a fair share of it is the wife. But as more women ascend to the executive suite, the proportions are gradually beginning to change. Alice Hector, a high-powered Miami lawyer earning over $300,000, is now fighting over custody of her kids with her ex-husband, Robert Young. Because he stayed at home, a Florida court on June 24 ruled that Young was entitled to primary custody, alimony, and child support. An outraged Hector is appealing the decision. She "never expected that something like this could happen," and is "very concerned" about what it means for working women, says her attorney, Lance A. Harke.
"MEAT GRINDER." For executives of both genders, the agonies of divorce--the trauma of ending a relationship, separating from children, and forging a new personal life--are only heightened by the complications of so much wealth. Former Cadence Designs Systems CEO Joseph Costello, who says he paid $30 million last year to settle his divorce, likens the experience to "being pushed into one end of a meat grinder." At work, CEOs "are used to getting what they want, when they want it, if not yesterday," says Manhattan divorce attorney Leonard G. Florescue. To their shock, in divorce court, their business achievements are valued the same as tasks such as changing diapers, cooking meals, and chauffeuring kids. And their hard-won savings are being divvied up accordingly.
That's proving hard for many CEOs to swallow. By the time Costello married Margaret, a former recruiter for Cadence, in 1989, he was already president of the firm. "I built Cadence--that's my work of art. I didn't build it with her," he says, fuming. After two years of warfare, he ended up giving Margaret their spectacular second home in Carmel, Calif., and 700,000 shares in Cadence, a third of his holdings at the time. "To have a major piece ripped away felt like I was being violated," he complains.
Not a lot of executive wives sympathize. Many were electrified by the highly publicized Wendt case. Lorna's battle for half their estate raised consciousness, much as the Anita Hill case had for victims of sex harassment. Since the Wendt case, women are "taking a much harder stand," reports New York divorce attorney Harriet Newman Cohen. "They're telling me, `I want to fight like Lorna Wendt fought."' A new BUSINESS WEEK/Harris Poll of Americans in households earning over $100,000 shows a wide chasm between men and women on this controversial issue. Among women polled, 52% agreed with Lorna's claim that she was entitled to half of the estate, in contrast with 34% of the men.
Gary Wendt and Joe Costello can blame their troubles on a legal revolution that has been at least two decades in the making. As recently as 1970, most states simply gave property at divorce to the spouse who held title--usually the husband. Even after a long marriage, the wife was often "cut off after divorce," says Chicago attorney Michael Minton. "If she was lucky, she got the house--but usually not enough money to maintain it." Wives generally made out better, though, in the eight so-called community property states, including California and Texas.
By 1985, women's activism had forced every state to adopt laws calling for a more equitable division of estates at divorce. The idea was that wives deserved a fair share of the property, even if everything was in the husband's name. That, of course, begged the question of what was "fair." In his 1983 book, What is a Wife Worth?, Minton used input from economists, industrial psychologists, and others to calculate the value of the work done by an executive wife, assuming the husband had to hire someone to replace her. In 1985, "we arrived at an aftertax value of $75,000 per year," says Minton, which has now "been upgraded to $189,000 per year." But this approach--which still favored any high-placed male executive--has now given way to the view that marriage is "an economic partnership in which homemakers have as much value...as the employed spouse," says Mary Kay Kisthardt, editor of a journal for matrimonial lawyers.
Proponents contend that this premise is fairer to wives who have voluntarily sacrificed their careers for the good of the family. Martha L. Fineman, a Columbia University family-law professor who testified for Lorna Wendt and Wendy McCaw, points out that marriage is "a partnership that produces many different things: children, sexual satisfaction, emotional support, a home, and--of course--money." But at divorce, much of what women typically contribute, such as child care, has been consumed. The couple is left with "the economic things," she says. Because courts now see marriage as a shared endeavor, they increasingly rule that the wife deserves half of what's left over, Fineman says.
"DISCARDED IDEA." One of the first cases articulating the new view involved Edson deCastro, co-founder and then-CEO of Data General Corp. Edson argued he was a "genius" whose "unique role in the computer industry" entitled him to most of the couple's Data General stock. It was a brazen argument for a man who, the court found, had years earlier moved out of the house to live with another woman, leaving his wife, Jean, to assume "90% of the responsibility" for the nonfinancial needs of their three children. In 1993, the Massachusetts Supreme Court dismissed his appeal as "a resurrection of the discarded idea that the wage earner is entitled to most, if not all, of the benefits of paid work." It then upheld a ruling that Jean should get half their $17.4 million estate.
To be sure, many executive spouses still win far less than half the pie. Lorna Wendt, the unofficial "poster wife" of the revolution, admits that the $20 million she received in her divorce "is not anything near 50%" of their estate, and she's appealing for a full 50%.
In addition to dividing property more equally, courts are also steadily expanding the pot to include new types of assets. Many, for example, have been targeting stock options--often the bulk of an executive's wealth. Thanks to the growing practice of compensating top execs with stock and the roaring bull market, the CEOs of 180 of the nation's largest public companies held an average of $28.7 million in their company's options at the end of 1997, according to the compensation firm Pearl Meyer & Partners.
Until the mid-1980s, stock options were not even considered property subject to distribution in most states. But now, virtually every state considers vested options marital property. And the courts increasingly are going after unvested options that have been granted during the marriage but are not yet exercisable at the time of divorce. Why? Because as long as the options were granted for work done during marriage, they are just as much a form of "marital property" as other income.
This has opened a Pandora's box for divorcing executives and their companies. Since New York and other states have held that options are "marital property" insofar as they were granted for past services, rather than as a future incentive, divorce courts must now grill companies on the strategic thinking behind their benefits plans as well as on what the options might be worth. This frequently forces corporate employees to testify in divorce court. Moreover, it is virtually impossible to place an accurate value on unvested options. If the stock falls, they might prove worthless. But that hasn't stopped courts from valuing them, albeit with varying results.
Judge Edward Jordan in Cook County, Ill., argues that the fairest approach is simply to set the options aside until they mature. But in the Wendt case, the judge concluded this would create too much potential for "continued strife and hostility." Instead, he devised a complex formula for valuing Gary's GE options, then ordered him to pay Lorna half that amount.
Another dicey problem that's arising more frequently: when husband and wife have built a business together. That's the central issue in the pending divorce trial of Isabell and Comer Cottrell. When Isabell met Comer in 1975, he was the owner of a fledgling ethnic hair-care products company, Pro-Line Corp., now based in Dallas. The following year, Isabell says, she joined the company, and in 1977, they were married. Over time, thanks to products such as hair relaxers, Pro-Line's sales have risen to nearly $60 million. Isabell, a former Miss Black Alabama, rose from market analyst to executive vice-president, even as she raised their children. Comer says that Isabell overstates her role in Pro-Line.
In the August trial, Isabell will argue she is entitled to half of Pro-Line, worth up to $60 million. But last year she accepted a $2.8 million settlement, which she is now trying to get out of. To get most of the money, Isabell says, Comer insisted she would have to work as a "special consultant" to Pro-Line, reporting only to her ex-husband, at an effective salary of $180,000 a year--a fraction of what she made as executive vice-president. Comer disputes her version of the facts and argues that the company is his sole property, since he owned it prior to the marriage.
Faced with such contentiousness, more executives are rushing to protect themselves. For high-ranking businesspeople of both sexes, prenuptial agreements remain by far the most effective weapon. Yet they are still the exception, not the rule. In the BUSINESS WEEK/Harris Poll, just 3% said they had signed a prenup, even though roughly one-third had been married at least twice. One reason: Getting an intended to sign "is not as easy as it may sound," says Boston attorney Harold Potter.
DEADLINE PRESSURE. And prenups are not ironclad. If the poorer spouse isn't fairly treated, the contract may be nullified. That's what happened to Florida hotelier Philip J. McCabe. Two days before marrying Gayle Hjortaas in 1987, he suddenly presented her with a prenup that didn't disclose his net worth, then $2 million. Hjortaas, who had zero net worth, was given "only one day to seek counsel...or cancel the wedding," a Florida court found. When the marriage collapsed six years later, McCabe sought to enforce the prenup, which provided Hjortaas just $48,000. But the court, ruling the prenup was both "the product of duress" and "inequitable," threw it out instead.
Other types of deals between divorced couples are also being scrutinized anew. Last year, a New York appeals court refused, in a preliminary ruling, to enforce a postnuptial agreement, a rare type of contract that is essentially a prenup made after marriage. The postnup in question, signed in 1995 after a 29-year marriage, provided that Ellen Reich should immediately receive $11 million in exchange for giving up her rights to the other assets of husband Gerald I. Reich, a wealthy attorney. But after Gerald filed for divorce, Ellen, says her attorney Norman Sheresky, moved to have the postnup set aside, alleging that he had used "terror and intimidation...to dupe me into signing a document that...grossly undervalued our assets." The charges "are all untrue," says Gerald's attorney, Peter Bronstein. The matter is now headed to trial.
Meanwhile, executives who don't have prenups are often turning to aggressive new strategies to reduce their spouse's take in a divorce. Dallas attorney Michael McCurley, president of the American Academy of Matrimonial Lawyers, says so-called predivorce planning strategies are becoming increasingly common. One tactic is to "game" compensation by pushing more of it into the future. Some executives, for example, get their boards to say that stock options are being granted for future as opposed to past services. Others are "concealing offers, declining promotions, and deferring opportunities" until after the divorce, says Miami attorney Maurice J. Kutner, who heads the American Bar Assn.'s Family Law Section.
Executives in private companies can sometimes push the boundaries of ethics even further. They're often masters at disguising income as corporate "benefits." By having the company pick up the tab for everything from cars to trips, "you might see an executive with a W-2 of $50,000 but a lifestyle of $300,000," says Bruce L. Richman, an accountant with Clifton Gunderson LLC. And businesspeople in private companies almost always undervalue their private holdings, which are far trickier to analyze than public entities.
Perhaps the most extreme strategy, and the most ethically dubious, is to shift assets into an offshore trust in such havens as the Cayman Islands, Belize, and Gibraltar, which don't recognize U.S. divorce judgments (box). They can be remarkably effective. Stephen C. Maloney, a Boston attorney, recently represented a woman who "essentially gave up" after being told it would cost $100,000 just to figure out how much money her husband had in his Channel Islands trust.
In another case, now being tried in Santa Fe, wealthy Swiss industrialist Donald Hess moved most of his stock in Hess Holding, estimated to be worth more than $200 million, to an offshore trust in Gibraltar just two months before filing for divorce from his wife, Joanna, a former model and an American citizen, in New Mexico.
Now, the New Mexico court has appointed PricewaterhouseCoopers to determine the value of the assets Donald transferred to Gibraltar. The report is due in August. But even if they come up with a number and the court awards Joanna a big judgment, it will be difficult for her to collect because of Gibraltar's laws erecting obstacles to creditors.
For their part, wealthy wives are also using increasingly aggressive tactics, sometimes leveling ugly abuse charges. In her 1996 divorce from billionaire investor Fayez S. Sarofim, Linda Hicks Sarofim asked that their prenuptial agreement be thrown out and accused him of alleged assault, false imprisonment, and spousal rape. She also sought $100 million in damages. When the case was resolved in late 1996, before the trial was to begin, the Texas judge sealed the settlement and barred comments about its terms. Fayez strongly denies all charges that he mistreated his ex-wife.
Given such nastiness, it's not surprising that most attorneys say the best strategy is to settle out of court. That's how more than 90% of executive divorces are resolved. Settling is cheaper, avoids the publicity of a trial, and lets execs craft deals that minimize taxes. It gives an executive the best shot by far at keeping more than 50% of the estate--most large cases settle with the dependent spouse taking less than half. Lorna Wendt says she has heard from "many, many women" who struck such lopsided deals "because they couldn't deal with the pressure" from their husbands.
But as wives grow more assertive, settling isn't always a cakewalk. Costello, the former Cadence CEO, relates how after hearing what he felt was an unreasonable settlement proposal from his ex-wife, Margaret, he contacted her father, a Wisconsin developer, to enlist his help in reaching a quick settlement. With the father's blessing, he offered $10 million to $12 million. Margaret was furious. "I totally felt he was using my Dad" by putting forward a figure huge by Wisconsin standards but a sliver of Costello's Silicon Valley-size fortune. Her hard line paid off: He ultimately shelled out $30 million. "I didn't want my whole life to be about this," he says. For executives, the overall message is unmistakable: Marriage is one of the most important business decisions they'll ever make. And if things fall apart, the divorce is likely to be a lot more upsetting than any business deal gone sour.