The Golden Parachute

5114 Words Mar 9th, 2016 21 Pages
MGMT 322 G1
INTERNATIONAL CORPORATE GOVERNANCE AND STRATEGY

THE GOLDEN PARACHUTE

Prepared for:
Professor Toru Yoshikawa
By:
Matthew Lim Zhi Liang
S9118245I

An Introduction to the Golden Parachute
When we talk about executive compensation, one topic that never fails to come up is the Golden
Parachute. The Golden Parachute, as the name suggest is an executive safety net of sorts that is included in the employment contracts of senior-level executives. Basically it is a special payment – usually a lump-sum amounting to millions, that is paid in the event of a change in control of the company1. The reasons for the implementation of the Golden Parachute is something that has been constantly debated, but the most common
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That could occur if a company chooses to adopt the Golden Parachute

Alignment of Management & Shareholder Interest
As mentioned at the beginning of this paper, one of the main objectives of the Golden Parachute is to control the behaviour of management in a acquisition event. During a acquisition event, the bidding company or the acquirer would often bypass the executives and the management and go straight to the shareholders, offering a premium over the current trading share price, which can be seen as a increase to shareholder wealth5. However, often times once the acquiring company gains control, the acquired company’s management is usually either sidelined or dismissed from the company. That being the case, there inherently exist a conflict between the interest of the management (to preserve their source of income) and the interest of shareholders (to maximise wealth).

Management as has been well established in the corporate world has the duty to act in a way that is in the interest of the shareholders, and often this involves making decisions that maximise shareholder wealth. However, in light of the prospect of losing their jobs after a acquisition, management might not act in the best interest of the shareholders and oppose the acquisition in order to maintain

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