The golden parachute

The golden parachute

November 19, 2009 23:33
3 minute read.
Zohar Bronfman  248.88

Zohar Bronfman 248.88. (photo credit: Ariel Jerozolimski [file])

The controlling shareholders of Discount Bank, the Bronfman family, decided to replace their chairman, Shlomo Zohar. He was not anxious to give up his position, but after negotiations with the owners, he agreed to step down voluntarily in return for a better severance package: approximately NIS 6 million - nearly doubling his original package. According to media reports, the money will come directly from the owners and not from the company. Paying off executives to get them to agree to step down is a common practice, commonly called a "golden parachute." Sometimes it involves management and the ownership or board of directors, but it is especially common in takeover attempts. The acquiring company usually wants to install its own management team, but at the same time it wants the cooperation of the current management; often this is obtained by paying incumbents to leave. The practice raises many ethical questions. In fact, State Comptroller Micha Lindenstrauss has put Discount's move on hold until he examines if it is in the public interest. (The government doesn't have the right to invoke the public interest to snoop around business dealings of ordinary firms, but the high degree of government regulation of, and support for, banks makes the government a quasi-owner, which justifies a higher level of scrutiny.) The obvious objection is that a person's job doesn't belong to him. Demanding payment for something that you control but isn't yours is commonly called "extortion" and is generally condemned. From this point of view, we would question the propriety of the manager who accepts the payment, and likewise that of the owner or director who uses shareholder money to give in to this demand. The ethical objection is particularly salient in takeover cases. If the takeover is in the best interest of the shareholders, then the managers - who are the agents of the shareholders - should agree to it even without the payoff. If it is not in the interest of the shareholders, they should reject it even with the payoff. In that case, the phenomenon is particularly ugly. On the other hand, there are practical and ethical claims to be made in favor of allowing the practice. One ethical claim is that managers get paid in various kinds of recompense; they do want money, but also unmeasurables like fame and challenge. Some people just really enjoy exercising authority, hobnobbing with big shots, filling subordinates with awe, occupying a corner office and so on. Quite a few want to test themselves against a worthy task. Many managers would not agree for any amount of money to work at a company that shuns ostentation, such as Ikea or Wal-Mart. Quite a few don't need the money and work only for the challenge and recognition. If a severance package is meant to cover normal departures, then when you out someone prematurely you deprive them of more than their salary. So it might be considered fair to give them some extra payment. A more practical approach goes like this: It is a shame that managers would be willing to put their personal interests before those of the owners and interfere with steps that help the company. But such is human nature, and it is unrealistic to think that people will not take steps to protect their jobs. While the right to strike is basic, jobs don't belong to unions either, and when unions go beyond striking and workers take steps to prevent themselves from being replaced (such as picket lines), this is also a kind of extortion. But the public interest in these cases is minimal, and negotiations like this are best left to the parties involved. If companies want to takes steps to keep managers or workers from obtaining this kind of bargaining power, it's their own business to sweat over it. A counterclaim is that when golden parachutes are sanctioned, managers may purposely do a bad job to get their contracts bought out. My feeling is that the golden parachute is an ugly practice, but in most cases is the lesser evil. Senior managers and blue-collar workers are inclined to use whatever entrenched power they have to hold on to their jobs. Sometimes it makes sense just to pay them off instead of taking elaborate steps to withhold this power from them. There is indeed a public-interest aspect to golden parachutes, and I can understand Lindenstrauss's desire to exercise oversight. But I think that in the Zohar case, the process is so logical and the sums so moderate that the public interest is not compromised by the deal. Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).

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