There are many troubling things that go on in corporate executive suites that most shareholders know nothing about. A perfect example is the golden parachute that many boards of directors agree to give CEOs. It's worth learning more about golden parachutes, at least so that you can think twice before investing in companies that feature egregious ones.
So what, exactly, is a golden parachute? It's part of an executive's compensation package and is an agreement that he or she will receive a specified sum if or when they lose their job -- whether by being fired, by a management change related to a merger or an acquisition, or some other reason.
The agreed-upon sum is typically shockingly generous, which is why it's deemed "golden." It's troubling because it's shareholder money going to a departing executive who will no longer be serving the company. And in many cases, it's going to a CEO who has been terminated because of unsatisfactory performance -- and who is nevertheless being rewarded with riches.
Is there any rationale for them? Well, yes. Proponents will argue that a golden parachute can help attract talented CEOs and that it might prevent a takeover due to the unpleasant cost of ejecting the sitting CEO.
Reviewing some examples of golden parachutes will give you a much clearer understanding of what they are. Here are just a few noteworthy ones:
- Meg Whitman, CEO of Hewlett-Packard (NYSE:HPQ), stands to receive almost $91 million if there's a change of control at the company, and more than $51 million if she's terminated.
- Staples (NASDAQ:SPLS) and Office Depot (NASDAQ:ODP) are looking to merge, and if they do, the CEO of Office Depot may collect $39 million in accelerated vesting of stock awards. (The FTC has objected to the merger, but Staples is objecting to its reasoning.)
- Dell is buying storage giant EMC (NYSE:EMC) and EMC's CEO is collecting a severance package worth $27 million, including some accelerated vesting of stock awards.
- Freeport McMoRan (NYSE:FCX) co-founder James Moffett is stepping down from the company, which has seen its shares plunge about 70%over the past yet, and according to Bloomberg, "Life after Freeport-McMoRan will have its benefits for outgoing chairman James 'Jim Bob' Moffett: namely, a payout that could reach $83.3 million plus $1.5 million in annual consulting fees."
- Back in 1995, Michael Ovitz was hired by Walt Disney (NYSE:DIS), only to leave with a severance package worth $140 million after just 14 months on the job.
There are good examples, too. According to a UBS report, for instance, the CEOs of Apple and Akamai Technologies stand to receive $0 if they're terminated, while CEOs at IBM and Accenture plc will get bupkis if there's a change in their control of the company.
For those disgusted or alarmed by golden parachutes, there's cause for hopeful optimism. Public awareness of and displeasure with them has been rising, and attempts are being made -- with some success -- to rein them in.
Earlier this year, for example, the Council of Institutional Investors (CII) approved a policy opposing ending automatic accelerated vesting of unearned stock awards, suggesting that boards be able to permit full, partial or no accelerated vesting.
Meanwhile, golden parachutes don't appear to be growing significantly, as they have in the past. A study by the Alvarez & Marsal firm found, "The average total value of change in control benefits for the top 200 CEOs remained relatively flat at $29,853,057 in 2013 compared to $30,263,141 in 2011. More telling, far fewer companies are now "grossing up" payments by paying the departing CEO for the taxes he or she will owe on the severance package. While 61% of CEOs in 2009 stood to benefit from gross-ups, only 30% did in 2013.
What to do
Armed with a better understanding of golden parachutes, what should we individual investors do? Well, we might think twice about investing in companies that offer their CEOs hefty severance packages. Such arrangements often waste shareholder dollars, and they certainly don't motivate CEOs to stick around and position the company for long-term success.