Poisoned Chalice? An Analysis of Investor Voting on Golden Parachutes

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2017-04-07

Posted by Nick Dawson, Proxy Insight, on Thursday, April 6, 2017
Editor's Note: Nick Dawson is Managing Director and co-founder of Proxy Insight. This post is based on a Proxy Insight publication by Mr. Dawson. Related research from the Program on Corporate Governance includes Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Data from Proxy Insight finds that investor voting on Golden Parachutes is not what it seems, with some investors voting in favor of controversial proposals, despite their voting policies saying otherwise.

So far this year, many of the proposals most firmly opposed by shareholders have related to “golden parachutes”—large payments made to a company’s top executives if they lose their position after a takeover. This is at least partly because merger approvals, which require a vote on golden parachute plans, are one of the reasons a company might call a special meeting.

These special meetings dominate the agenda and bring issues like golden parachutes to the fore, even though they are relatively rare compared to, for example, Say on Pay votes.

U.S. companies have been required to submit golden parachute proposals to a shareholder vote since 2011 under the Dodd-Frank act. When a company calls a meeting for the approval of a merger, the law demands that executive compensation plans be disclosed and an advisory shareholder vote on those plans be taken.

A Contentious Issue

Golden parachutes can be divisive to say the least. Their supporters argue that they make it easier to hire and retain top executives, especially in industries where mergers are common. Proponents also believe that, by softening any concerns about dismissal, these payments help executives to remain impartial if the company does become the subject of a takeover or merger. On top of this, it is suggested that the cost of paying out golden parachutes can form a barrier to help discourage takeovers.

Those who oppose golden parachutes, on the other hand, have answers to each of these points. They argue that executives are already offered ample compensation and should not be further rewarded simply for being let go.

Such critics also point out that executives have an inherent fiduciary responsibility to act in the best interests of the company and its shareholders. A company’s executives should not need additional financial incentives to keep them objective. As for the cost of compensating such executives, opponents argue that this is tiny compared to all the other costs of a merger and is unlikely to form an effective anti-takeover mechanism.

Golden Parachutes and Governance

Whether or not something is considered good governance is often, at least in part, defined by the policies of major investors. When it comes to compensating executives after a merger, we have analyzed the policies of ten key investors and found that they mostly take a balanced position.

For example, BlackRock’s policy says “When determining whether to support or oppose an advisory vote on a golden parachute plan, BlackRock normally support the plan unless it appears to result in payments that are excessive or detrimental to shareholders.”

In all the cases we looked at where an investor’s policies take a case-by-case position, there were specific, defined issues that could lead to a vote against the recommendations. The issues most commonly included are:

  • Benefits paid that exceed three times salary and bonus.
  • Single-trigger plans.
  • Tax gross ups.

Single-trigger plans are golden parachutes that do not require the termination of the executive in order to pay out. This means an executive may keep their job in the newly-combined company and still receive compensation, so it is not hard to see why investors take a dim view of these provisions.

Tax gross ups are increases to payouts in order to compensate individuals for money lost in tax.

For example, if an executive is promised a payout of $1,000,000 and the applicable tax rate is 20%, the company would increase the payment to $1,250,000. After the 20% ta x has been paid, the executive is left with the promised $1,000,000 in full. Critics of tax gross ups argue that if an executive is fortunate enough to receive a multi-million-dollar payout, it should not also be the company’s responsibility to foot their tax bill.

The Voting Data

Using data from Proxy Insight, it is possible to compare the policies of investors with their actual voting record.

While investors typically oppose the principle of golden parachutes, caveats in their policies of ten result in much higher support for the issue than might be expected.

This is highlighted in Table 1, where 8 out of 10 investors supported more than half of all golden parachute resolutions they voted on, indicating that there are at least some investors paying lip service to good governance through their policies, yet taking a very different approach in practice.

This could help to explain the fact that, despite their divisive nature and tendency to provoke a fair amount of shareholder opposition, golden parachute proposals still rarely fail. Of the 438 golden parachute proposals that Proxy Insight has collected, all but 30 proved to be successful with the average level of support for these being 83%.

As public opinion on executive pay has turned increasingly sour, fund managers have sought to appease critics with assurances that they will hold companies to account. The votes, however, show a tendency to defer to management.

The data in Table 1 also highlights just how divisive golden parachutes can be. The average level of support for management among the ten investors we analysed is 90%, but the average level of support for golden parachutes is only 68%.

Two examples of investors taking a stand against golden parachutes were particularly striking. Firstly, Vanguard are normally very passive, supporting management 95% of the time. However, when it came to golden parachutes they are far more aggressive, supporting only 40% of proposals. Even more militant are T. Rowe Price. They normally support management 93% of the time, but voted in favor of golden parachutes just 14% of the time.

2017 will likely see further escalation of investor backlash against executive pay generally. As this process continues, it will be interesting to keep an eye on golden parachutes to see if wider discontent will result in even more aggressive opposition to executive compensation proposals.

Table 1: Investor Voting on Golden Parachute Proposals

Investor Votes For (%) Votes Against (%) AllianceBernstein LP 70 30 BlackRock 93 7 BNY Mellon 66 34 Dimensional Fund Advisors, Inc. 68 27 Fidelity Management & Research 68 31 Goldman Sachs Asset Management LP 73 17 Northern Trust 99 1 SSgA Funds Management, Inc. (State Street) 90 7 T. Rowe Price 14 83 Vanguard Group 40 59

Source: Proxy Insight