When Shareholders and Managers Disagree: Evidence from shareholder voting

Transcription

1 When Shareholders and Managers Disagree: Evidence from shareholder voting Stuart L. Gillan Department of Finance Terry College of Business 351 Amos Hall University of Georgia Athens, GA Nga Q. Nguyen College of Business Finance Department 328 Straz Hall Marquette University Milwaukee, WI This version: January 16, 2018

2 When Shareholders and Managers Disagree: Evidence from shareholder voting Abstract Golden parachutes, or change in control payments, to executives when a firm is sold are controversial. Indeed, the level of concern is such that the Dodd-Frank Act mandated that firms hold an advisory (or non-binding) vote on such payments. We study 446 mergers between 2011 and 2015 and find that Institutional Shareholder Services (ISS) recommendations and shareholder support for golden parachutes varies with deal, firm, and parachute characteristics Specifically, we find that votes against parachutes increase with the payment amount and the presence of single-triggers and tax gross-ups. In contrast, while firm size is positively associated with ISS against recommendations, against votes are lower for those with a higher deal premium. Finally, we find little evidence that dissatisfaction with parachutes adversely affects voting for the deal itself or the labor market prospects of directors overseeing the payments. 1

3 Yahoo CEO Marissa Mayer stands to collect a $44 million severance package if she leaves after Verizon completes its purchase of the once-mighty internet company. The executive stands to collect $3 million in cash and almost $41 million worth of stock options and awards under a golden parachute agreement. Associated Business Press, 9/9/ Introduction As the anecdote above about Yahoo indicates, there is continued interest in executive compensation arrangements, or golden parachutes, surrounding mergers and acquisitions. While golden parachutes might provide executives with incentives to facilitate a change in control of the company in a manner that adds value for shareholders (e.g. Almazan and Suarez (2003)), there are also potential conflicts of interest with such payments. Specifically, as noted by Fich, Tran, and Walkling (2010), the CEO, who typically plays a key role in the sales process, might have incentives to sacrifice premium in order to close the deal and receive her golden parachute. This issue has, however, not escaped the attention of practitioners and regulators. Indeed, shareholder rights advocates and proponents of good governance practices have noted their preferences on parachute characteristics. Moreover, industry reports suggest that many firms have changed their parachutes over time to align with such preferences. For example, Frederic W. Cook & Co (2016) reports that most change in control plans are now double-trigger rather than the historically prevalent single-trigger (that is, the plans specify that payoffs are contingent on both a change in control of the company and involuntary termination of the executive within a specified time frame). Similarly, paying excise tax gross-ups on parachute payments has all but disappeared. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) requires that public companies hold a non-binding (advisory) vote on payments to executives whenever the firm seeks shareholder approval for.an acquisition, merger, 2

4 consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer. This so-called say on golden parachute vote takes place at a potential end-point in the relationship between the CEO/board and the target firm shareholders. Thus, say-on-parachute voting outcomes provide a unique setting to assess shareholder views on payments to executives at a time when potential agency conflicts might be paramount. 1 We first explore the factors that are associated with Institutional Shareholder Services (ISS) recommending its clients vote against a golden parachute. We focus on ISS as it is the leading proxy advisor and prior work suggests that voting outcomes are associated with proxy advisor recommendations (Morgan and Poulsen (2001); Bethel and Gillan (2002); Malenko and Shen (2016)). 2 We then study the variation in shareholder voting on both the transaction and the golden parachute as a function of deal, firm, and parachute characteristics (including the ISS recommendation). Together, these analyses provide insights into how both ISS and shareholders view the transaction, the parachute payments, and arguably the potential agency conflicts at this critical juncture in firms lives. A natural follow-up question is how effective is shareholder voting on golden parachutes? Given that such votes are non-binding and take place at an end-point in the relationship between the executives, board, and shareholders, directly testing the effectiveness of shareholder voting on parachutes is challenging. Thus, as an indirect test, we examine how opposition to such payment are associated with labor market outcomes for the directors who approved the package. 1 An exception to the requirement to vote at the time of the sale is if the firm previously included a vote on parachutes in its say on pay vote. However, a review of ISS voting records suggest that this is rarely the case. 2 ISS reportedly has a 60% market share, while Glass Lewis the other major proxy advisory firm has a 35% market share. We are unable to obtain Glass Lewis voting recommendations. 3

5 Our results suggest that the proposed sales generally enjoy strong support from both ISS and shareholders. On average, ISS recommends that shareholders support the transaction 98% of the time, and the actual shareholder vote in favor averages 97%. In contrast, there is substantial variation in the support for golden parachutes. ISS recommends that its clients vote against the parachute for approximately 24% of our sample firms. Moreover, for firms that receive a negative recommendation, shareholder support averages only 63% in favor. This is substantially lower than the average support of 88% for parachutes where ISS supports the payments, and is significantly lower than the coincident merger votes. We also find that variation in votes against parachutes is generally associated with the preferences expressed by many institutional investors (and ISS proxy voting guidelines). That is, parachutes that have larger payments, single triggers, and those with excise tax gross-ups are more likely to receive a negative ISS recommendation. These characteristics are also associated with lower shareholder support, even after controlling for the ISS recommendation. This suggests that ISS recommendations do not fully capture shareholder preferences, and further, that shareholders in aggregate do not simply follow ISS recommendations. Additionally, we find that parachutes at deals with higher premium receive greater shareholder support as do those where there is greater shareholder support for the transaction itself. We also find that firms receiving greater voting support for their most recent executive compensation say-on-pay vote receive more favorable parachute votes. Overall, golden parachutes tend to be supported by both ISS and shareholders alike; however, for about a quarter of our sample there is concern about the payment as exhibited by ISS against recommendations and relatively strong shareholder opposition. Even in these cases, 4

6 the efficacy of shareholder voting on parachutes is questionable as we find little evidence of damaged labor market prospects for the board members at these firms. The remainder of the paper proceeds as follows. Section 2 provides background and literature review. The sample and data are described in Section 3. Section 4 reports descriptive statistics, while section 5 contains our multivariate analyses. Section 6 concludes. 2. Background and literature review. In the context of mergers and acquisitions a change-in-control payment plan, or golden parachute, specifies what constitutes a change in control and the payments to executives that result. The rationale for parachutes is to align the incentives of managers and shareholders in the event of a takeover bid. Specifically, if the firm is acquired, managers are at risk of losing their job. Thus, to protect their expected income from the firm, executives may have incentives to block takeovers that are otherwise in shareholder interests. By compensating the executives for the lost income that results from being acquired, parachutes have the potential to attenuate this conflict of interest (e.g., Knoeber (1986)). Prior work, however, suggests that other conflicts of interest might arise at the time of the deal. For example, Hartzell, Ofek, and Yermack (2004) report that target CEOs typically receive substantial golden parachutes, and some receive upward adjustments to their parachutes, other financial benefits, or positions with the acquirer around the time of the transaction. Moreover, the authors suggest that extraordinary treatment of the CEO seems to be associated with lower premiums for target firm shareholders. This raises the specter that managers are taking actions to benefit themselves at the expense of the shareholders. Similarly, Fich, Tran and Walkling (2010) 5

7 report that while the economic importance of the parachute to the CEO increases the likelihood of takeover it decreases the premium, which is suggestive of managerial self-interest. Others have examined different types of payments to target CEOs around the sale of the firm. For example, Heitzman (2011) suggests that boards use equity grants around bids to enhance bargaining incentives for CEOs when they have greater influence over the deal price. He finds no evidence that such grants adversely affect target shareholders. In contrast, Fich, Cai and Tran (2014) report that when CEOs are given unscheduled option grants in proximity to a bid, target firms are more likely to be acquired but at lower premiums. However, Fich et al also suggest that such grants appear to substitute for golden parachutes, compensating target CEOs for the benefits they forfeit as a result of the merger. Similarly, Fich, Rice and Tran (2016) conclude that most merger bonuses appear to compensate target CEOs for deficiencies in the existing exit package. However, some bonuses are associated with wealth transfers from target shareholders, especially at firms where there is prior evidence of potential agency problems. Despite the fact that target shareholders rarely vote deals down, there remain concerns about compensation paid to target executives around the time of acquisitions. Such concerns played no small part in motivating the Dodd-Frank Act requirement of a shareholder vote on parachutes, the so-called say on golden parachute. While there is variation across firms, a typical parachute pays 3 times salary and bonus, allows for accelerated vesting of equity-based compensation, and potentially provides other benefits such as health insurance and reimbursement for excise taxes on parachute payments. In some cases, the agreement also includes clauses specifying that the executive comply with non-compete and/or non-solicitation of employees and customers for a specified time period. Another key feature of parachutes is whether they are single- or double-trigger. Under a single trigger plan the parachute pays off 6

8 irrespective of whether or not the executive remains employed with the combined entity after the sale. This contrasts with a double-trigger plan where the parachute payment is conditioned on both the change in control and the executive leaving the firm within a specified timeframe - either on their own volition for good reason or if dismissed by the company without cause. 3 Shareholder concern about parachutes centers on the magnitude of payments to executives at the time of the transaction, the potential conflicts of interest that those payments might give rise to, and several of the specific parachute features outlined above. The Dodd- Frank requirement of a say on parachute vote allows us to provide a direct assessment of shareholder concerns about parachute payments and perceived conflicts of interest. We do so by focusing on proxy advisor firm voting recommendations and shareholder voting outcomes for golden parachutes. 3. Data We identify 446 target companies with a transaction value greater than $10 million that held shareholder meetings between June 2011 and December 2015 to approve i) the sale of the company and ii) a golden parachute for the firm s executives. 4 For all firms we use the ISS Voting Analytics Database to extract ISS recommendations and voting outcomes for both the merger and the parachute. Our main variables of interest are ISS Rec Against GP (ISS Rec Against Merger) which is a binary variable that takes a value of 1 if ISS recommends its clients vote against the golden parachute (the merger), and Shareholder Vote Against GP (Shareholder 3 Good reason, for example, might include a change in salary, responsibilities, or job location greater than 50 miles from the current location. Cause implies a breach of contract on the part of the executive, e.g., a violation of company policies. 4 Those for which the required data for our empirical analyses is mostly available. 7

9 Vote Against Merger) which is the percentage of shareholder votes against the golden parachute. 5 We also extract the ISS recommendation and voting outcomes for each company s most recent say-on-pay vote prior to the merger meeting (most recent executive compensation plan). Specifically, ISS Rec Against SOP is a binary variable that takes a value of 1 if ISS recommends its clients vote against the firm s most recent say on pay proposal. Shareholder Vote For SOP is the percentage of shareholder votes cast in favor of the most recent say-on-pay vote. We include these as proxies for the overall concern about the firm s compensation policies. We collect details of the golden parachute package for the CEO and all senior executives at each firm including: the total value of the parachute payment (CEO Golden Parachute) and the amount of each component (bonus, severance, stock and option, tax reimbursement, and benefits) from firms SEC filings (including DEFM 14A, DEF 14A, 424B3, and S-4). Severance and Cash bonus is the sum of the CEO s severance and cash bonus, Equity Amount is the total cash value of CEO s stock and stock option payments. All Exec Golden Parachute is the total parachute payment for all executives, including the CEO. We also identify whether the CEO s cash or stock/option payment is single-trigger (which results in a payout if there is a change in control regardless of the executive s employment status after the acquisition) or double-trigger (which results in a payoff only if there is a change in control and the executive is terminated without cause or leaves the firm with good reason within a specified time frame after the change in control). Single-trigger parachute payments are generally viewed negatively by institutional shareholders, and ISS often recommends an Against vote on such plans. Single Trigger Severance and Cash Bonus and Single Trigger Equity are binary variables that take a value of 1 if the proposed golden parachute 5 Specifically, we measure the percentage of votes cast against relative to a base of (votes cast for + votes cast against + abstentions). 8

10 payment plan has cash component or equity-based component, respectively, that is paid when the change in control occurs regardless of the CEO s employment status. We combine the parachute data with deal characteristics from the Securities Data Corporation (SDC) mergers and acquisitions database. Deal characteristics include: Deal Value (the total transaction value); Stock Deal (a binary variable that equals 1 if the merger consideration is stock or a combination of stock and cash, and zero if all cash); and Target Premium (the deal premium measured as the offer price relative to the target stock price 4 weeks prior to the announcement). We also control for other variables that might be associated with ISS voting recommendations and voting outcomes. For example, institutional investors have a fiduciary obligation to vote, and many institutions use proxy advisory firms analyses to inform their voting decisions. Additionally, many institutions have espoused voting policies and preferences as to the desirable and undesirable features of many voting issues, including golden parachutes. Thus, we use Number of Institutional Shareholders, Institutional Ownership, and Institutional Herfindahl Index based on 13F data from Thompson Reuters as proxies for firms ownership structures. To control for firms corporate governance, we use Board Size (the total number of board members) and Board Independence (the proportion of independent directors on the board). Further, we control for CEO s most current compensation package by including the CEO s most current total annual compensation, Total Compensation. Other firm-specific controls from CRSP and Compustat include: Firm Size, which is the natural logarithm of the firm s total assets, Industry-adjusted ROA the return on total assets adjusted by the 2-digit SIC industry median return on total assets, and Abnormal Returns, a Fama-French 3-factor adjusted annual stock return for the year prior to the meeting. Details of 9

11 the construction of these and other control variables appear in Appendix 1. While our base sample comprises 446 companies, due to missing covariates, some specifications have a slightly smaller number of observations. 4. Univariate analyses Table 1 reports summary statistics for key variables in the paper. Columns 1-4 focus on the full sample. We then partition the sample based on whether or not ISS recommended their clients vote For (Columns 5 and 6) or Against (Columns 7 and 8) the golden parachute. Columns 9 and 10 provide tests for whether the means (t-tests) and medians (Wilcoxon tests), respectively, of the two subsamples are equals. Insert Table 1 here On average, CEOs receive a total parachute worth $11 million (median $5.39 million). This is economically significant relative to the average annual compensation of $3.4 million (median $1.76 million). The parachute payments are comparable in magnitude to sign-on bonuses averaging about $7 million (Xu and Yang (2016)) and holdbacks of about $11 million (Gillan and Nguyen (2016)). On average 43% of the total parachute payment is based on salary and bonus, 47% derives from the value of stock and stock options (often paid as cash), and approximately 3% is in the form of tax gross-ups. Almost 20% of the sample firms have a single-trigger requirement for the cash payment for their CEO. In addition, some 55% have a single-trigger criterion for paying the CEO the cash value their stock and stock options. 6 6 Recall that the single trigger payment simply requires that a change of control take place, unlike a double trigger that specifies the CEO s employment with the firm must also cease. 10

12 On average, the dollar value of the parachute payments for which ISS recommends Against (column 5) are more than twice as large as those where ISS recommends a For vote (column 7) and almost 3 times larger at the median (columns 6 and 8). Moreover, 34% of firms with an Against recommendation have single-trigger cash severance versus 15% of firms with a For recommendation. Similarly, in column 5, 71% of firms with an Against recommendation have a single-trigger for a cash payment of the value for stock and stock, compared to 50% of firms with a For recommendation (column 7). These findings are generally consistent with the ISS voting guidelines in that ISS has identified excess payments and single-trigger provisions as a basis for a potential Against recommendation. At the same time, it is also apparent that ISS does not uniformly recommend against plans with such features, suggesting a more nuanced assessment of the parachutes payments as opposed to a one-size-fits-all recommendation policy. ISS recommends its clients vote against the sale of the firm only 2% of the time, but against the golden parachute in approximately 24% of the cases. ISS recommended against the prior say on pay vote for some 11% of the sample. 7 Voting against parachutes averages 16% (11% at the median), which is substantially higher than the average voting against the transaction itself of 2% (0% at the median). Firms with an ISS Against recommendation for the parachute have a higher mean and median shareholder vote against of around 34% (in columns 5 and 6) versus some 10% against when ISS recommends a For vote (columns 7 and 8). 8 A 34% Against vote is very high in the context of shareholder voting. Despite the variation in parachute support, there are no significant differences in ISS recommendations against, or shareholder opposition to, the proposed merger across the two subsamples. On balance, these findings suggest that 7 The voting support levels are consistent with prior work such as, Bodnaruk and Rossi (2016), Matvos and Ostrovsky (2010), and Burch, Morgan, and Wolf (2004). 8 The difference is similar to that reported in other papers such as example, Bethel and Gillan (2002), Morgan and Poulsen (2001), Ertimur et al (2013), Malenko and Shen (2016). 11

13 shareholders are concerned about parachute payments for a non-trivial portion of the sample, but such concerns are insufficient for shareholders to unilaterally vote deals down. With regard to other variables, we find that firms with an Against recommendation are larger, pay their CEOs more (as measured using the most recent annual compensation), and have more institutional investors than firms with a For recommendation. There is no significant difference between firms with an Against recommendation and other firms in terms of the concentration of institutional ownership, board size, or board independence. Insert Table 2 here Table 2 reports the correlation coefficients between several key variables. There is a strong correlation between shareholder voting outcomes on the parachute and ISS recommendations against both the parachute (68%, significant at the 1% level) and the merger (8%, significant at the 1% level). Similarly, there is a positive correlation between shareholder votes on the parachute and shareholder votes on the merger. However, there is no significant correlation between ISS recommendations on the merger and its recommendations on the parachute. The Table 3 findings also suggest that ISS recommendations and shareholder voting are correlated with key characteristics of the parachute. We explore these issues in depth in a multivariate framework in the next section. 5. Multivariate Analyses 5.1. ISS voting recommendations We first examine the factors associated with ISS recommendations to vote against the golden parachute. The results reported in Table 3 are based on Probit specifications where the dependent variable ISS Rec Against GP is a binary variable that takes a value of 1 if ISS 12

14 recommends shareholders vote against the parachute, and zero otherwise. In the base model (Model 1) we include several variables that capture key characteristics of the golden parachute. This includes the natural logarithm of the total dollar amount of the parachute for the CEO (Ln(CEO Golden Parachute)), whether or not the parachute has a single-trigger provision for severance and cash bonuses (Single-Trigger Severance and Cash Bonus), whether or not the parachute has a single-trigger provision for stock and stock options (Single-Trigger Equity), whether or not the parachute pays tax gross-ups/reimbursements for amounts in excess of 3 times the current salary and bonus (Tax Gross Up), and whether or not the parachute pays any pensionrelated benefits (Pay Pension) or other benefits including health care, insurance, or job placement services (Pay Benefit). As proxies for excessive parachute payments, we add GP Salary Multiplier (Model 2) to our base model. GP Salary Multiplier is a binary variable that takes a value of 1 if the CEO total parachute amount is more than 3 times the CEO s current salary. Overall these variables correspond to several of the parachute-related features that institutional investors have identified as problematic, and/or that ISS has noted might trigger an against recommendation (ISS )). In Model 3 we incorporate Number of Institutional Investors and a Herfindahl Index of institutional ownership. Firms with greater institutional ownership are more likely to have specific governance preferences that are reflected in ISS voting recommendations. Similarly, if institutional ownership is more concentrated, then the preferences of those larger shareholders will potentially be weighed more heavily by ISS in setting voting policies. Model 4 adds Board Size and Board Independence as proxies for internal governance. If boards are effective in their governance role, it is less likely that they will propose packages subject to opposition by ISS and shareholders. 13

15 In model 5, we include ISS Rec Against SOP which indicates whether or not ISS recommended that shareholders vote against the firm s most current say-on-pay proposal. The rationale is that an ISS Rec Against SOP captures general concerns that ISS has about the firm s compensation practices. That is, if ISS has recommended against the firm s compensation plans in general, they might be more inclined to issue an against recommendation for the golden parachute. In Model 6 we add other firm controls, including firm Size, Industry-adjusted ROA, Abnormal Returns, and Target Premium. For all specifications, we include year fixed effects to control for unobserved time-related factors such as changes in ISS recommendation policies and institutional voting preferences (as investors might become more informed about parachute proposals over time). We report the marginal effect of a one-standard deviation change for continuous variables and a change from zero to 1 for binary variables. Insert Table 3 here Across all models (Models 1-6) we find that the total value of the parachute, the presence of tax gross ups, and single-trigger provisions are positively associated with ISS against recommendations. 9 A one standard deviation increase in total parachute payment ($16 million) increases the likelihood of an ISS against recommendation by approximately 2% (Model 1). Similarly, parachutes with single-trigger cash payments are 12% more likely to receive an against recommendation, while those with single-trigger stock and option cash payments are 6% more likely to receive an against recommendation. With regard to tax gross-ups, ISS is 1.5% more likely to issue an against recommendation when these provisions are present. All of these 9 In place of Ln(CEO Golden Parachute), we use Golden Parachute scaled by the Deal Value. While the significance of other variables does not change, the coefficient on the scaled measure is not significant suggesting that the dollar value of the parachute is of primary concern to ISS. 14

16 changes are statistically significant (at the 1% level) and economically significant given the unconditional against recommendation likelihood of approximately 24%. The findings are also consistent with the stated concerns of both institutional investors and ISS voting about such practices. In Model 2, we find no evidence to suggest that relative measure of the parachute payment amount, GP Salary Multiplier, is associated with an increased likelihood that ISS recommends against the parachute plan. 10 If ISS recommended against the most recent say-onpay proposal they are more likely to issue an against recommendation on the parachute, although the marginal effect is less than 1% (Models 5 and 6). In addition, larger firms are more likely receive an against recommendation from ISS, although the marginal effect is again small (Model 6). The Number of Institutional shareholders, the Herfindahl Index, Board Size, and Board Independence have no association with the likelihood of an ISS against recommendation. Overall, the results in Table 4 are consistent with ISS focusing on the plan characteristics when making recommendation against the company s parachute, and not broader aspects of firms ownership structure or governance (as we measure them) Shareholder voting outcomes We now focus on shareholder voting outcomes using OLS specifications. To facilitate the economic interpretation, instead of reporting coefficients we report the marginal effect of a onestandard deviation change for continuous variables and a change from zero to 1 for the binary variables. The dependent variable is the percentage of votes cast against the parachute. Similar to the analysis of Table 3, we first focus on the characteristics of the parachute. In Model 1 we include the natural logarithm of total parachute value for the CEO (Ln(CEO Golden Parachute)), 10 As robustness test, in place of GP Salary Multiplier, we use GP Total Comp Multiplier which is calculated as the CEO total parachute payment divided by the deal value and the results are similar. 15

17 whether or not the company pays tax gross-ups (Tax Gross Up), whether or not the company has single-trigger provision for severance and cash bonus (Single-Trigger Severance and Cash bonus), whether or not the company has single-trigger provision for stock and stock option (Single-Trigger Equity), and whether or not the company pays a pension (Pay Pension) or other benefits such as health care, insurance, or outplacement services (Pay Benefit). Model 2 include a measure of relative total parachute (GP Salary Multiplier). Model 3 adds deal characteristics including Deal Value, if the deal consideration includes stock (Stock Deal), and the deal premium for the target shareholders Target Premium. Model 4 includes Shareholder Vote For Merger which is the percentage of votes cast in favor of the merger, and the percentage of votes cast in favor of the most current say on pay proposal Shareholder Vote For SOP. Model 5 controls for institutional ownership by adding Number of Institutional Investors and Herfindahl Index. Model 6 includes other firm and board characteristics. Given that many institutional shareholder voting preferences appear to be correlated with ISS recommendations, rather than include the ISS recommendation directly (which would be correlated with the parachute characteristics) we include Abnormal ISS Rec Against GP. Abnormal ISS Rec Against GP is estimated as the residual from a regression of ISS Rec Against GP on the parachute s main characteristics (i.e. Model 1 of Table 4). The rationale is to capture omitted factors associated with the ISS recommendation that may be associated more generally with shareholder voting on parachutes. 11 All specifications include year fixed effects. The results, reported in Table 4, suggest that shareholder against votes vary with the total parachute payment, whether the plan includes tax gross ups, and the presence of single-triggers. A one-standard deviation increase in Ln (CEO Golden Parachute) is associated with an 11 This might also capture unique information contained in the ISS recommendation. 16

18 increased vote against of approximately 5%, significant at the 1% level (Models 1-6). Across all specifications, the presence of tax gross ups is associated with an increase in vote against of some 11-12%, also significant at the 1% level. Having a single-trigger payment on either severance and cash bonus or equity is associated with 2-4% higher votes against with the level of significance varying depending on the specification. Furthermore, Abnormal ISS Rec Against GP is associated with significantly higher shareholder opposition of 6-7% (at the 1% level) consistent with the ISS recommendation informing shareholder voting decisions. In contrast to the ISS recommendation analysis of Table 3, relative measures of the total parachute payment are significantly associated with shareholder votes. In particular, a parachute greater than 3 times the CEO s current salary receives approximately 1% more votes against (Models 2-5) although the level of significance varies depending on the specification. Note that the unconditional proportion of votes against is approximately 16%, therefore these findings are also economically significant. Further, if a plan were to have all of these features, it would translate into 28% more votes against the proposal, again, an economically significant amount relative to average voting outcomes. In terms of deal characteristics, we find that while the target shareholder premium generally has a positive coefficient, suggesting increased shareholder support with increased premiums, it is statistically significant in only one specification (Model 6). Shareholder support for the merger itself and support for the prior compensation plan are both associated with less shareholder opposition to the parachute (Models 3-5). A one-standard deviation increase in shareholder support for the merger is associated with approximately 4% fewer votes against the parachute, while a one-standard deviation increases in shareholder support for most recent say-on-pay proposal is associated with roughly 3% fewer votes against 17

19 the parachute (Model 6). Lastly, Models 5 and 6 show that firms with higher institutional ownership concentration have less opposition to their parachute. It is possible that firms with higher institutional ownership concentration are, ceteris paribus, more likely to have their parachutes conform to the preferences of large and powerful shareholders. None of the other variables including firm and board controls are associated with the proportion of votes cast against the parachute. Overall, the findings in Table 4 suggest that while shareholder votes are generally consistent with ISS recommendations, and vary with the characteristics of the parachute, shareholders also appear to consider other factors in their voting decision. For example, the perception of payments being excessive as measured by a parachute that is more than 3 times salary (GP Salary Multiplier), over and above any assessment by ISS, and the deal premium are associated with overall parachute support Effect of shareholder support on directors labor market prospects Although the intent of the say-on-parachute requirement was to curb potentially excessive payments to executives, the fact remains that the shareholder vote on golden parachute is non-binding. Moreover, as we have noted, the vote takes place at an endpoint in the relationship between the executives, board, and shareholders at many target firms. Thus, a natural question is: how effective is shareholder voting in this context? One way to assess this question is to examine whether or not shareholder dissatisfaction with the payments is reflected in the subsequent labor market for board members who approved the parachute. To explore this issue, we study the labor market prospects for target firms board members. In particular, we measure director labor market status as the change within 2 years of the merger in the: number of public company directorships ( Number of public boards), number 18

20 of public and non-public directorships ( Number of total boards), and whether or not a director obtains a new directorship after the sale (New Directorship). We were able to identify 3,564 directors at 430 of the sample target firms with information on directorships before and after the transaction. Insert Table 5 here In Table 5 we partition the director sample into those where the parachute received an against/for ISS recommendation and those where the parachute received higher/lower than the median percentage of Against votes from shareholders. At first blush, the changes in directorships for each subsample are similar, suggesting that neither ISS recommendations nor shareholder votes have a dramatic effect on director labor market outcomes. Across all panels, we see that directors lose approximately one directorship, consistent with the prior literature finding that directors lose their position with the target firm. However, across all cells the Directors with New Public Directorships (%) is close to zero, but non negative suggesting that a small number of individuals obtain new public company board seats. We examine this issue further in a multivariate setting. Our dependent variable is Number of public-boards (Models 1-6). We use Negative Binomial models with year fixed effects. 12 The results are reported in table 6. In each specification, we first include ISS Rec Against GP (Models 1 and 2), Shareholder Against GP (Models 3 and 4), and ISS & High Shareholder Vote Against which is a binary variable that takes a value of 1 if the ISS recommend against the parachute and the proportion of shareholder votes against the golden parachute is greater or equal to 30% (Models 5-6). ISS Rec Against GP and Shareholder Against GP are highly correlated as shown before, therefore we only include one of them at a time in the 12 As robustness test, we also cluster by firms and our results (not tabulated) are similar. 19

21 regression. Models 3-4 control for some key characteristics of the deal, the firm, and director age. Insert Table 6 here From Models 1-6, neither ISS recommendation nor shareholder voting support of the golden parachute is significant, suggesting that ISS Against recommendations and shareholder opposition to parachutes are not associated with target firm directors future board seats. In terms of control variables, in Models 2, 4 and 6, we find that directors of better performing firms as proxied by Industry-adjusted ROA have 37-40% increase in their directorships, while a onestandard-deviation increase in Director Age is associated with approximately 30% decrease in the number of directorships. Overall, the findings in Table 6 suggest that negative ISS recommendations and shareholder votes against the parachute have at best a minimal association with future labor market outcomes for directors. This is consistent with the findings of Ertimur, Ferri and Maber (2012) who report little in the way of penalties for directors involved in stockoption backdating, but at odds with Ertimur, Ferri and Stubben (2009) and Brunarski, Campbell, Harman, and Thomson (2017) who report negative labor market effects for directors at firms who ignore majority vote shareholder proposals or receive low say on pay votes, respectively. 6. Conclusion Exit packages for target CEOs linked to a sale of the firm, so-called change in control payments or golden parachutes, continue to attract scrutiny from academics, regulators, and shareholders alike. Indeed, concerns about the magnitude of such payouts contributed to the Dodd-Frank Act mandate that firms hold an advisory (or non-binding) vote on such payments. We examine shareholder concern about such payments by studying ISS recommendations and 20

22 shareholder voting on golden parachutes at firms when their shareholder also vote to approve a sale of the firm. This represents a period during which potential conflicts of interest between CEOs, their boards, and shareholders may be paramount as it often denotes an end-point in the relationship between these parties Our results suggest that there is substantial variation in support for golden parachutes. Of note, approximately 24% of the target firms in our sample receive Against recommendations from ISS, a leading proxy advisory firm. Moreover, shareholder opposition to the parachute payments in those cases averages 34%, which is markedly higher than the average opposition of 10% for parachutes with ISS For recommendations. More generally, we find that variation in votes against golden parachutes is associated with parachute features that have been espoused by many institutional investors as undesirable, and features identified by ISS as potentially problematic. Specifically, large parachutes, and those with single triggers or excise tax gross-ups are more likely to receive negative voting recommendations from ISS and greater opposition from shareholders. However, excessive parachutes, and parachutes in deals with higher premia or deals with higher shareholder support typically garner more votes in favor. Finally, we find little evidence that shareholder opposition to golden parachutes manifests itself in damaged labor market prospects for the board members at target firms. 21

23 References Almazan, A. and J. Suarez Entrenchment and Severance Pay in Optimal Structures. Journal of Finance 58, Bebchuk, L., A. Cohen and C.Y. Wang Golden parachutes and the wealth of shareholders. Journal of Corporate Finance 25, Bethel, J. E. and S. Gillan The impact of the institutional and regulatory environment on shareholder voting. Financial Management 31, Bodnaruk A. and M. Rossi Dual ownership, returns, and voting in mergers. Journal of Financial Economics 120, Brunarski, K., T. C. Campbell, Y. Harman, and M. E. Thomson Do directors suffer external consequences for poor oversight of executive compensation? Evidence from sayon-pay votes, working paper, Miami University of Ohio. Burch T.R, A.G. Morgan and J.G. Wolf Is acquiring-firm shareholder approval in stock-for-stock mergers perfunctory? Financial Management 33, Cai, J. and R. A. Walkling Shareholder s say on pay: Does it create value? Journal of Financial and Quantitative Analysis 46, Correa, R., and U. Lel Say on pay laws, executive compensation, pay slice, and firm valuation around the world. Journal of Financial Economics 122, 3, Ertimur, Y., F. Ferri and S. R. Stubben Board of directors responsiveness to shareholders: Evidence from shareholder proposals. Journal of Corporate Finance 16, Ertimur, Y., F. Ferri and D. Maber Reputation penalties for poor monitoring of executive pay: Evidence from option backdating. Journal of Financial Economics 104, Ertimur, Y., F. Ferri and D. Oesch, Shareholder votes and proxy advisors evidence from say on pay. Journal of Accounting Research 51, Fich E.M., A.L. Tran and R.A. Walkling On the importance of golden parachutes. Journal of Financial and Quantitative Analysis 48, Fich, E.M., E.M. Rice and A.L. Tran Contractual revisions in compensation: Evidence from merger bonuses to target CEOs. Journal of Accounting and Economics 61, Fich, E.M., J. Cai and A.L. Tran Stock option grants to target CEOs during private merger negotiations. Journal of Financial Economics 101, Frederic W. Cook & Co. 2016, Executive severance and change in control practices. Gillan, S. and N. Nguyen Incentives, Termination Payments, and CEO Contracting. Journal of Corporate Finance 41, Hartzell J. C., E. Ofek and D. Yermack What's in it for me? CEOs whose firms are acquired. Review of Financial Studies 17, Heitzman, S Equity grants to target CEOs during deal negotiations. Journal of Financial Economics 102,

24 Institutional Shareholder Services Proxy voting guideline updates. Knoeber, C.R Golden parachutes, shark repellents, and hostile tender offers. The American Economic Review, 76(1), pp Malenko, N., Y. Shen The role of proxy advisory firms: Evidence from a regression-discontinuity design, The Review of Financial Studies, 29, 12, Matvos G. and M. Ostrovsky Cross-ownership, returns, and voting in mergers. Journal of Financial Economics 89, Morgan, A.G., and A.B. Poulsen Linking pay to performance compensation proposals in the S&P 500. Journal of Financial Economics 62, Xu, Jin and J. Yang, Golden hellos: Signing bonuses for new top executives. Journal of Financial Economics 122,

25 Appendix 1. Variable Definitions Variable ISS Rec Against GP (1/0) Shareholder Against GP (%) Shareholder Against Merger (%) ISS Against Merger CEO Golden Parachute ($000) All Exec Golden Parachute ($000) Severance and Cash bonus (%) Severance and Cash bonus ($000) Single Trigger severance and cash bonus (1/0) Equity Amount ($000) Equity Amount (%) Single Trigger equity (1/0) Tax Gross Up (1/0) Tax Gross Up (%) Pay pension (1/0) Pay benefit (1/0) GP Salary Multiplier GP Total Comp Multiplier GP Deal Value Multiplier Incentive-based compensation (%) ISS Against SOP Shareholder For SOP (%) Description A binary variable that takes a value of 1 if ISS recommends its clients vote against the golden parachute, and zero otherwise The percentage of shareholder votes opposing the golden parachute relative to a base of (votes cast for + votes cast against + abstentions) The percentage of shareholder votes opposing the merger relative to a base of (votes cast for + votes cast against + abstentions) A binary variable that takes a value of 1 if ISS recommends its clients vote against the merger, and zero otherwise The total value of the parachute payment, including bonus, severance, stock and option, tax reimbursement, and benefits the total parachute payment for all executives, including the CEO The sum of the CEO s severance and cash bonus components of the golden parachute The proportion of total cash value of CEO s severance and cash bonus payments relative to the total parachute payment A binary variable that takes a value of 1 if the company pays cash to the CEO when the change in control occurs, regardless of the CEO s employment status, and zero otherwise Total cash value of CEO s stock and stock option payments The proportion of total cash value of CEO s stock and stock option payments relative to the total parachute payment A binary variable that takes a value of 1 if the company pay stock or stock option cash value when the change in control occurs, regardless of the CEO s employment status, and zero otherwise A binary variable that takes a value of 1 if the company pays tax gross up/ reimbursement as part of its golden parachute, and zero otherwise The proportion of tax gross up/reimbursement relative to the total parachute payment A binary variable that takes a value of 1 if the company pays pension as part of its golden parachute, and zero otherwise A binary variable that takes a value of 1 if the company pays benefits such as health care, insurance, or job placement services as part of its golden parachute, and zero otherwise A binary variable that takes a value of 1 if the total amount of golden parachute is more than 3 times the CEO's current salary, and zero otherwise Is calculated as total golden parachute amount divided by the CEO's most current total annual compensation Is calculated as total golden parachute amount divided by the transaction value The proportion of CEO's most current equity-based compensation relative to his/her total annual compensation A binary variable that takes a value of 1 if ISS recommends its clients vote against the most current annual compensation schedule, and zero otherwise The percentage of shareholder votes supporting the most current compensation plan relative to a base of (votes cast for + votes cast against + abstentions) 24

26 Total Compensation ($000) Deal Value ($M) Stock Deal Target Premium Number of institutional shareholders Herfindahl Index Institutional ownership (%) Size BM ROA Abnormal returns Board size Board independence Current listed-board seats Current total board seats Director age CEO's most current total annual compensation The natural logarithm of the transaction value A binary variable that takes a value of 1 if the method of payment is stock or a combination of stock and cash, and zero otherwise The deal premium measured as the offer price relative to the target stock price 4 weeks prior to the announcement Number of institutional investors Sum of squared percentage ownership by the five largest stockholders Proportion of shares owned by institutional investors The natural logarithm of total assets Book value to market value of total equity Return on assets A Fama-French 3-factor adjusted annual stock return for the year prior to the meeting Total number of board members The proportion of independent directors on the board Total number of directorships in public companies Total number of directorships in public and private companies Average director age 25

27 Table 1. Descriptive Statistics This table reports summary statistics for key variables. Columns 1-4 focus on the full sample. Columns 5-6 report values for firms with an ISS Against recommendation, while columns 7-8 report values for the subsamples with an ISS For recommendations. Columns 9 and 10 provide tests for whether the means (t-tests) and medians (Wilcoxon tests), respectively, of the two subsamples are equal. All variables are defined in Appendix 1. Variable All sample ISS Recommend Against Golden Parachute ISS Recommend For Golden Parachute t-tests Wilcoxon's tests N Mean Median Std Mean Median Mean Median (5) - (7) (6) - (8) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) ISS Against GP (Y) N=108 N=338 ISS Against Merger (Y) ISS Against SOP *** 0.00*** Shareholder Against GP (%) *** 0.25*** Shareholder Against Merger (%) CEO Golden Parachute ($M) *** 8.55*** All Exec Golden Parachute ($M) *** 18.49*** Severance and cash bonus (%) ** -0.08** Equity amount (%) Single-Trigger Severance and Cash bonus (Y) *** 0.00*** Single-Trigger Equity (Y) *** 0.00*** Tax Gross Up (%) *** 0.00*** Tax Gross Up (Y) *** 0.00*** Pay pension (Y) * 0.00* Pay benefit (Y) ** 0.00** GP Salary multiplier >3 (Y) *** 0.00 *** GP Total comp multiplier *** 12 companies did not have golden parachute for the CEO but did have coverage for other executives. 26