The aim of this essay is to assess the usefulness of business leaders having “golden parachutes” by applying microeconomic reasoning to critically evaluate a ban of the practice. A definition of golden parachutes will be given in this introduction, while in the main part the most important pros and cons of a ban of this practice will be critically evaluated. In addition, various solutions for resolving the conflict of interest will be shown and explained using German regulations as an example.
Adopted in the late 1970s and early 1980s (Bedchuk, Cohen and Wang, 2012), a golden parachute is a controversial management perquisite that allows protected managers to voluntarily resign and collect substantial remuneration – in some cases several million dollars – after a triggering event, usually a hostile takeover (Cochran, Wood and Jones, 2013). Mogavero and Toyne (2013) refer to golden parachutes as a form of compensation insurance in the event of termination of employment following a change of corporate control. However, this is a very broad definition of golden para-chutes, with many authors referring to them as a bonus when a takeover occurs (Bedchuk, Cohen and Wang, 2012; Singh and Harianto, 2013; Machlin, Choe and Miles, 2013).
Table of Contents
I. Introduction
II. Main body
1. Reasons in favour of golden parachutes
2. Reasons against golden parachutes
3. Problem-solving approach for the conflict of having “Golden parachutes” or not
III. Conclusion
IV. Bibliography
1. Literature
2. Graphics
Objectives and Core Themes
The primary objective of this paper is to assess the usefulness of "golden parachutes" for business leaders by applying microeconomic reasoning to evaluate potential bans on the practice. The study critically analyzes the pros and cons of these compensation agreements within the context of takeovers and corporate governance, while exploring alternative solutions to mitigate conflicts of interest.
- Economic justification and definitions of golden parachutes.
- Evaluation of the "wealth transfer hypothesis" and shareholder impact.
- Analysis of German legal regulations regarding management compensation.
- The relationship between top management tenure and compensation magnitude.
- Impact of corporate ownership structures on governance and executive incentives.
Excerpt from the Book
2. Reasons against golden parachutes
Opponents argue that golden parachutes reduce stock values by facilitating wealth transfers from stockholders to executives (i.e. wealth transfer hypothesis).
Manne (1965) in particular argues that takeovers provide a means of disciplining managers into acting in the shareholders’ best interests. The primary assumption invoked in this line of reasoning is that competing managers can profit by acquiring firms that are being run inefficiently, firing the current management, and running the firm more efficiently. The threat of losing their own job to a competing manager limits the manager’s incentive to run the business in a manner contrary to the shareholders’ best interests. However, if golden parachutes serve to insulate management from the takeover market, the discipline provided by the takeover market is reduced, and this increases the manager’s ability to transfer wealth from the shareholders to himself (Lambert and Larcker, 1984).
As Lambert and Larcker (1984) demonstrated in their study of golden parachutes, executive decision-making and shareholder wealth, though, the golden parachute is associated with a statistically significant and positive security market reaction.
Nevertheless, golden parachutes can reduce discipline on a firm’s management, and therefore adversely affect shareholder wealth in three ways (Lambert and Larcker, 1984).
Summary of Chapters
I. Introduction: This chapter defines golden parachutes as controversial management perquisites and outlines the essay's goal of evaluating their utility through a microeconomic lens.
II. Main body: This section provides an overview of executive compensation levels and evaluates the conflicting arguments for and against golden parachutes, while also analyzing the German legal framework for corporate leadership.
III. Conclusion: The concluding chapter summarizes the moral hazard problems associated with takeover activities and concludes that there is no singular answer regarding their regulation, as decisions depend on company-specific factors.
IV. Bibliography: This section lists the academic literature and graphical data sources utilized for the analysis.
Keywords
Golden parachutes, microeconomic reasoning, takeover, wealth transfer hypothesis, executive compensation, corporate governance, shareholder wealth, moral hazard, German Stock Corporation Act, management tenure, ownership structure, takeover market, stock options, institutional investors, firm valuation.
Frequently Asked Questions
What is the core subject of this paper?
The paper examines the economic and corporate governance implications of "golden parachutes"—compensation agreements that protect high-level executives during events like hostile takeovers.
What are the primary themes discussed?
Central themes include the balance between executive protection and shareholder interests, the wealth transfer hypothesis, the disciplinary role of the takeover market, and legal approaches to limiting compensation.
What is the main research question?
The research assesses the usefulness of golden parachutes and critically evaluates whether implementing a ban on this practice is economically justifiable.
Which methodology is applied?
The author applies microeconomic reasoning to analyze the impacts of these agreements on corporate performance, market discipline, and shareholder wealth.
What does the main body cover?
The main body details arguments in favor of and against golden parachutes, analyzes their role in conflict resolution, and uses German regulations as a case study for "reasonableness" in compensation.
Which keywords best characterize the work?
Key terms include golden parachutes, wealth transfer hypothesis, takeover, corporate governance, shareholder wealth, and moral hazard.
How does the author view the "wealth transfer hypothesis"?
The hypothesis suggests that golden parachutes allow managers to insulate themselves from takeover discipline, potentially transferring wealth from shareholders to executives, which leads to adverse impacts on firm value.
What role does German law play in the author's analysis?
German law serves as a practical example of how statutory "reasonableness" tests (Section 87 I AktG) are used to prevent excessive compensation packages for management boards.
Why might golden parachutes actually be beneficial for stockholders?
Proponents argue that these contracts help attract and retain top talent and reduce conflicts of interest, potentially making executives more willing to support takeovers that are beneficial to shareholders.
What is the final conclusion regarding a ban on golden parachutes?
The author concludes that there is no universal "right or wrong" answer; the appropriateness of these agreements depends on a company's specific ownership structure, size, and susceptibility to takeovers.
- Arbeit zitieren
- Jochen Kasper (Autor:in), 2013, Golden Parachutes. Pros, Cons and a Problem-solving Approach, München, GRIN Verlag, https://www.grin.com/document/276544
