Lack Of Time In The Seat, A Crisis In Leadership

Golden parachutes may be a symptom of dysfunction on the board level—evidence of a leadership crisis—causing CEOs to primarily focus on how to emerge unscathed.

Maureen O’Brien is the director of corporate governance at Marco Consulting Group—a consulting firm that represents institutional shareholders in proxy voting. She said some boards defend golden parachute policies as an incentive to prevent executives from getting cold feet during mergers that might cause them to leave earlier than desired, thereby threatening future earnings the board might enjoy.

“An incentive works both ways,” she said.

At the same time, she noted, companies will argue that the promise of a golden parachute does not incentivize executives to seek a deal primarily for a windfall and departure.

Malizia said, as the average tenure of CEOs decreases fairly steadily, golden parachutes have become “a notion that does not reflect the reality of the time we are living in.”

“Also, with these types of provisions, we have seen CEOs trying to create the next deal that helps them get this windfall—not a good reason for a corporate transaction,” he said. “We want to see deals happen because they make sense and have a sustainable business plan going forward.”

Malizia said the negative implications of golden parachute arrangements also have the potential to worsen or create other undesirable outcomes.

For example, “They exacerbate the big problem of the widening inequality gap between the top-end and front-line earners. Now becoming fewer and farther between, front-end earners have less retirement and post-employment type of programs paid through the company. Yet executives are paid to leave the company,” Malizia said.

Golden Parachutes Have A Valid Purpose, Still

However, boards and CEOs have argued that there is a still a time and place for golden parachutes in today’s business environment.

Some golden parachutes may be dependent on and bound by pre-existing contractual agreements, and cannot be changed without the potential of legal challenge.

“This is a sort of ‘closing the barn door after the horse escapes’ situation,” McCormick said. “Because these payments are bound by a pre-existing contract made by a previous board years earlier, before the transaction happened, an existing board is honoring an agreement made through a prior board’s decision at that point.”

Robert McCormick, chief policy officer at Glass, Lewis & Co., added that if boards were to refrain from abiding by the contractual agreement, it could potentially result in a lawsuit—or more relevant, it could negatively impact talent recruitment and retention.

A severance package that isn’t quite “golden” enough could create a challenge for board compensation committees searching for a replacement CEO or other executive, Malizia said. But the desire for a soft landing upon dismissal should not be an executive’s primary incentive, he continued.

“Yes, we want top talent and we want to be able to retain people, but I don’t think the greatest attraction to your job should be the soft cushion you get when you walk out the door,” he said. “Especially when there are other provisions, such as supplemental pensions, other retirement benefits and large amounts of compensation that are paid to these individuals during their tenure.”