Abstract
Golden parachutes are often viewed as a form of excessive compensation because they provide senior management with substantial payouts following an acquisition while other stakeholders are subjected to layoffs, disrupted business relationships and other negative externalities. Using a sample of S&P 500 firms, an economic and ethical justification for this type of contract is given. Golden parachutes ensure effective corporate governance that, in turn, preserve the firm's value for all stakeholders. Boards of directors enter into parachute agreements to protect recently hired CEOs' human capital during periods of financial uncertainty and, thus, potential takeover activity. From an ethics viewpoint, golden parachutes are valuable to all stakeholders because they encourage merger or acquisition in lieu of bankruptcy.
Similar content being viewed by others
References
Agrawal A., C. Knoeber: 1998, Managerial Compensation and the Threat of Takeover. Journal of Financial Economics 47, 219–239. doi:10.1016/S0304-405X(97)00044-5
Andrade G., M. Mitchell, E. Stafford: 2001, New Evidence and Perspectives on Mergers, Journal of Economic Perspectives, 15(2), 103–120
Bebchuk L., J. Fried: 2003, Executive Compensation as an Agency Problem, Journal of Economic Perspectives 17(3), 71–92. doi:10.1257/089533003769204362
Bloom, M.: 2004, The Ethics of Compensation Systems, Journal of Business Ethics 52, 149–152. doi:10.1023/B:BUSI.0000035910.90075.3d
Borokhovich K., R. Parrino, T. Trapini: 1996, Outside Directors and CEO Selection, Journal of Financial and Quantitative Analysis 31, 337–355. doi:10.2307/2331395
Brown, M.: 2006, Corporate Integrity and Public Interest: A Relational Approach to Business Ethics and Leadership, Journal of Business Ethics 66(1), 11–18. doi:10.1007/s10551-006-9050-4
Brown C., J. Medoff: 1988, The Impact of Firm Acquisitions on Labor in A. J. Auerbach (eds.), Corporate Takeovers: Causes and Consequences. University of Chicago Press, Chicago, IL, 9–25
Carr L., M. Valinezhad: 2004, The Role of Ethics in Executive Compensation: Toward a Contractarian Interpretation of the Neoclassical Theory of Managerial Renumeration, Journal of Business Ethics 13(2), 81–93. doi:10.1007/BF00881576
CFO Staff: 2005, ‹In the Same Language’, CFO Magazine, January 1, 2005
Chase D., D. Burns, G. Claypool: 1997, A Suggested Ethical Framework for Evaluating Corporate Mergers and Acquisitions, Journal of Business Ethics 16(16), 1753–1763. doi:10.1023/A:1005794127954
Chatterjee S., J. Harrison, D. Berg: 2002, Failed Takeover Attempts, Corporate Governance and Refocusing Strategic Management Journal 24, 87–96. doi:10.1002/smj.279
Cotter J., M. Zenner: 1994, How Managerial Wealth Affects the Tender Offer Process, Journal of Financial Economics 35, 63–97. doi:10.1016/0304-405X(94)90018-3
CRSP, Center for Research in Security Prices: 2007, Graduate School of Business, The University of Chicago
Davidson W., T. Pilger, A. Szakmary: 1998, Golden Parachutes, Board and Committee Composition, and Shareholder Wealth, Financial Review 33, 17–32. doi:10.1111/j.1540-6288.1998.tb01394.x
De George, R.: 1988, Business Ethics, 3rd edn. (Macmillan, New York, NY), p. 278
Diamond, S.: 2006, ‹The Delphi “Bankruptcy”: The Continuation of Class War by Other Means’, Dissent Magazine (Spring), http://dissentmagazine.org
Felo, A.: 2001, Ethics Programs, Board Involvement, and Potential Conflicts of Interest in Corporate Governance, Journal of Business Ethics 32(3), 205–218. doi:10.1023/A:1010711403915
Finkelstein, S.: 1992, Power in Top Management Teams: Dimensions, Measurement, and Validation, Academy of Management Journal, 35, 505–538. doi:10.2307/256485
Gallant, A. R.: 1975, Nonlinear Regression, American Statistician 29, 73–81. doi:10.2307/2683268
Gallant A. R., D. Jorgenson: 1979, Statistical Inference for a System of Simultaneous, Nonlinear, Implicit Equations in the Context of Instrumental Variable Estimation, Journal of Econometrics 11, 275–302. doi:10.1016/0304-4076(79)90041-1
Guay, W. R.: 1999, The Impact of Derivatives on Firm Risk: An Empirical Examination of New Derivative Users, Journal of Accounting and Economics 26, 319–351. doi:10.1016/S0165-4101(98)00032-9
Gilson S., M. Vetsuypens: 1993, CEO Compensation in Financially Distressed Firms: An Empirical Analysis, Journal of Finance 18(2), 425–458. doi:10.2307/2328907
Hadlock C., G. Lumer: 1997, Compensation, Turnover and Top Management Incentives: Historical Evidence, Journal of Business 70, 153–187. doi:10.1086/209714
Hanly, K.: 1992, Hostile Takeovers and Methods of Defense: A Stakeholder Analysis, Journal of Business Ethics 11(12), 895–913. doi:10.1007/BF00871956
Harris, D. and C. Helfat: 1997, `Specificity of CEO Human Capital and Compensation', Strategic Management Journal 18(11), 895–920. doi:10.1002/(SICI)1097- 0266(199712)18:11<895::AID-SMJ931>3.0.CO;2-R
Hartzell J., E. Ofek, D. Yermack: 2004, What’s in It for Me? CEOs Whose Firms are Acquired, Review of Financial Studies 17, 37–61. doi:10.1093/rfs/hhg034
Hausman, G.: 1978, Specification Tests in Econometrics, Econometrica 46, 1251–1271. doi:10.2307/1913827
Heller, Z.: 2002, ‹The Blurry Line Between a Little Treat and Gross Excess’, The Daily Telegraph, September 28
Hill C., P. Phan: 1991, CEO Tenure as a Determinant of CEO Pay, The Academy of Management Journal, 34(3), 707–717. doi:10.2307/256413
Huson M., R. Parrino, L. Starks: 2001, Internal Monitoring Mechanisms and CEO Turnover: A Long Term Perspective, Journal of Finance 56, 2265–2297. doi:10.1111/0022-1082.00405
Jensen, M.: 1988, Takeovers: Their Causes and Consequences, Journal of Economic Perspectives 2, 21–48
Knoeber, C.: 1986, Golden Parachutes, Shark Repellants, and Hostile Takeovers, American Economic Review 76, 155–167
Lambert R., D. Larcker: 1985, Golden Parachutes, Executive Decision Making, and Shareholder Wealth, Journal of Accounting and Economics 7, 179–204. doi:10.1016/0165-4101(85)90036-9
Lin C. Y., Y. Wei: 2006, The Role of Business Ethics in Merger and Acquisition Success: An American Study, Journal of Business Ethics 69, 95–109. doi:10.1007/s10551-006-9070-0
March, G.:1984 Notes on Ambiguity and Executive Compensation, Scandinavian Journal of Management Studies 1, 53–64. doi:10.1016/0281-7527(84)90009-4
Matsumura E., J. Shin: 2005, Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences, Journal of Business Ethics 62, 101–113. doi:10.1007/s10551-005-0175-7
Mogavero D., M. Toyne: 1995, The Impact of Golden Parachutes on Stock Returns: A Re-Examination of the Evidence, Quarterly Journal of Business and Economics 34, 30–38
Nichols D., C. Subramaniam: 2001, Executive Compensation: Excessive or Equitable, Journal of Business Ethics 29, 339–351. doi:10.1023/A:1010764828523
Pennsylvania Stakeholder Statute, 15 PA Cons Stat Ann 1715–1716 [sup 1992]
Perel, M.: 2003, An Ethical Perspective on CEO Compensation, Journal of Business Ethics 48(4), 381–391. doi:10.1023/B:BUSI.0000005803.24077.55
Rodgers W., S. Gago: 2003, A Model Capturing Ethics and Executive Compensation, Journal of Business Ethics 48, 189–202. doi:10.1023/B:BUSI.0000004589.34756.8a
Rosenstein S., J. G. Wyatt: 1990, Outside Directors, Board Independence, and Shareholder Wealth, Journal of Financial Economics 26, 175–192. doi:10.1016/0304-405X(90)90002-H
Schwartz M., T. Dunfee, M. Kline: 2005, Tone at the Top: An Ethics Code for Directors?, Journal of Business Ethics 58, 79–100. doi:10.1007/s10551-005-1390-y
Securities and Exchange Commission, http://www.sec.gov
Serpa, R.: 1988, The Often Overlooked Ethical Aspect of Mergers, Journal of Business Ethics 7(5), 359–362. doi:10.1007/BF00382538
Shleifer A., L. Summers: 1988, Breach of Trust in Hostile Takeovers, in A. Auerbach (ed.), Corporate Takeovers: Causes and Consequences (University of Chicago Press, Chicago, IL), 33–56
Shorey, J.: 1983, An Analysis of Sex Differences in Quits, Oxford Economic Papers 35, 213–227
Standard & Poor's Institutional Market Services, COMPUSTAT
Stead B., J. Miller: 1988, Can Social Awareness be Increased Through Business School Curricula, Journal of Business Ethics 7(7), 553–560. doi:10.1007/BF00382603
Strauss, G.: 2003, ‹Troubled Firms Entice CEOs with Platinum Pay’, USA Today, February 20, http://www.USATODAY.com
Topel R.: 1991, ‹Specific Capital, Mobility and Wages: Wages Rise with Job Security’, Journal of Political Economy 99, 145–176
Useem, J.: 2003, ‹Have No Shame?’, Fortune, April 14
Wade J., C. O'Reilly, I. Chandratat: 1990, Golden Parachutes: CEOs and the Exercise of Social Influence, Administrative Science Quarterly 35, 587–603. doi:10.2307/2393510
Wang J., H. D. Dewhirst: 2004, Boards of Directors and Stakeholder Orientation, Journal of Business Ethics 11, 115–123. doi:10.1007/BF00872318
Acknowledgments
We are thankful for the comments provided by Sally Gunz (the section editor), two anonymous referees, George Benston, Ann Gillette, Thomas Noe, Mark Pyles, and Michael Rebello. We also thank Kenneth Small for extensive comments during a presentation at the Southern Finance Association. Financial support for this project was provided by the College of Charleston’s School of Business and Economics. All remaining errors are our own.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Evans, J.D., Hefner, F. Business Ethics and the Decision to Adopt Golden Parachute Contracts: Empirical Evidence of Concern for All Stakeholders. J Bus Ethics 86, 65–79 (2009). https://doi.org/10.1007/s10551-008-9818-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-008-9818-9