Corporate Takeovers, Fairness, and Public Policy

By Zalewski, David A. | Journal of Economic Issues, June 2001 | Go to article overview

Corporate Takeovers, Fairness, and Public Policy


Zalewski, David A., Journal of Economic Issues


A defining characteristic of the 1980s was the wave of corporate takeovers that introduced many Americans to the colorful world of greenmail and golden parachutes. Andrei Shleifer and Robert Vishny (1997, 98) estimated that acquisitions during this decade involved $1.3 trillion in assets and 28 percent of the 500 largest US-based corporations. Although takeover activity slowed by the early 1990s, its recent resurgence in the United States and increasing popularity in Europe justify a reexamination of its consequences. [1]

Mainstream economists support an institutional environment that encourages acquisitions by arguing that a vibrant market for corporate control improves allocative efficiency by helping resolve agency problems. [2] Paradoxically, another strategy to address agency conflicts--compensating managers with shares of stock or stock options--may reward substandard performance in the event of a hostile takeover. This results from the premium paid by many acquiring firms for the undervalued shares of mismanaged firms. Since many executives benefit financially from these transactions, I argue in this paper that the market for corporate control often fails on ethical grounds because the burdens of takeovers are unfairly distributed. [3]

Like many types of market failure, ethical shortcomings in the market for corporate control result from power, which many executives exploit to negotiate contracts that reward them even if they perform poorly. As Salary.com vice president William H. Coleman observed: "Almost everyone understands that executives get paid a lot because they're entrusted with the responsibilities of a multimillion dollar corporation. But what they don't comprehend is that a CEO doesn't suffer when a company's fortunes take a turn for the worse." [4] Because nonexecutive employees and other stake-holders disproportionately bear the risk of poor corporate results, one-sided employment contracts are unfair.

Because recent changes in the executive labor market have increased the negotiating power of CEOs, it is unlikely that corporate boards will voluntarily resolve this problem soon. For this reason, the federal government should address the unethical consequences of corporate takeovers by revising current tax policy.

Executive Power and Compensation

Proponents of agency theory argue that the market for corporate control disciplines executives by threatening their jobs if they perform poorly. Although takeovers have cost many managers their jobs, many of them negotiate contracts that limit their financial risk. The following examples illustrate two of the most popular ways to accomplish this objective--option repricing and golden parachutes.

The Price Is Right

One common method of shielding executives from the consequences of poor performance is to change the exercise price of their stock options. For example, North Face Inc. became a leveraged-buyout target in September 1998 after its stock price fell from $26 to $9 per share amid financial irregularities. Soon after negotiations began, the board of directors repriced the stock options held by the top three executives from $21 to $9 per share. When the deal closed on February 27, 1999, at a price of $17 per share, Kathleen Morris (1999) estimated that CEO James G. Fifield gained $3 million from this adjustment.

Platinum Parachutes

Some of the most popular takeover defenses are golden parachutes, which provide large contingent payments to executives who lose their jobs after an acquisition. A particularly egregious example was the package granted to three senior executives at insurance giant Conseco Inc. According to Debra Sparks (1998), the stock options held by these managers had no exercise price. Thus, the entire share price paid by an acquiring firm would be a capital gain. Moreover, because these managers were to receive five times their annual salaries and bonuses following a takeover, Sparks estimated that an acquisition would have resulted in a $590 million windfall.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Corporate Takeovers, Fairness, and Public Policy
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.