September 20, 2018

“Say-on-Golden-Parachutes”: Exercise in Futility?

Here’s something Liz recently blogged on This study examines empirical evidence to conclude what most deal lawyers already know: advisory votes on golden parachutes aren’t very effective when it comes to curbing excessive pay. Institutional investors oppose golden parachutes in principle – and the failure rate for proposals has been increasing – but overall, caveats in voting policies result in higher support than you might expect. And as long as the deal’s approved, there’s not there’s not much of a consequence if some shareholders object to the severance arrangements.

The professors recommend adding some “teeth” to these votes. Here’s the intro:

We find that the Say-on-Golden-Parachute (“SOGP”) voting regime is significantly less promising than Say on Pay in controlling compensation. First, proxy advisors appear more likely to adopt a one-size-fits-all approach to recommendations on SOGP votes, focusing mainly on the presence of an excise tax gross-up provision and secondarily on aggregate payouts if extreme.

Second, shareholders appear more likely to adhere to advisor recommendations, with standard variables explaining far less of the voting results once controls for proxy advisor recommendations are removed. Finally, golden parachutes appear to be increasing in recent years and we find that golden parachutes that are amended immediately prior to an SOGP vote tend to grow rather than shrink.

These findings contrast with those of researchers who have studied Say-on-Pay. We suggest that the differences lie in the absence of second-stage discipline for SOGP votes. Directors at target firms who fail to respond to proxy advisor or shareholder complaints do not have to risk being voted out in subsequent elections since their directorships usually cease with the acquisition. For corporate governance more broadly, our findings suggest that advisory votes are only effective in certain situations where immediate or subsequent discipline is at least plausible.

We conclude by offering potential avenues for improving SOGP’s ability to shape compensation practices. They include making SOGP votes more binding and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.

John Jenkins