Question

Background: A few years ago, companies such as AIG, who had a hand in the cause of the economic downturn that has devastated our economy, were planning to give or actually gave out huge golden parachutes to the same executives who led and approved of the companies actions.

Instructions: Please answer the questions below:

1) Perform a search of a CEO who has received a golden parachute.

1a) Who was the CEO?

1b) What was the company from where he or she received the golden parachute?

1c) What was the total compensation in the golden parachute?

1d) What happened to the company after the CEO's departure terms of before and after revenue?

1e) After the CEO's departure, did the former CEO obtain a leadership position at another firm? If yes, what company.

2) Based on your reading of Chapter 10 of your DLR e-text, do you believe the payment of these golden parachutes was ethical, right or wrong, and why? Please be substantive in your answers.

Answer 1

1a)American International Group ousted CEO Martin Sullivan

1b)He received the golden parachute from American international group

1c) The total compensation was $68 million

1d) Dubbed the "Poster Boy" for excessive executive compensation, Sullivan was kicked out of office in June after shareholders and investors complained that the insurance and financial giant posted two quarters of losses.

Three months after Sullivan left, A.I.G. was nearly bankrupt. The U.S. Treasury Department bought $85 billion of the firm to prop it up, noting that the firm's failure would create more devastation for the rest of the global financial sector.

1e) Sullivan post AIG joined as Chairman and CEO of Willis Global Solutions, which oversees brokerage and risk management advisory services for Willis’s multinational and global accounts.

2)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.

However I find them wrong as they entrench existing managers in their jobs by deterring takeovers. In that sense, they subsidize existing management at the expense of shareholders. When the golden parachute is eventually paid, it subsidizes the then departing managers at the expense of shareholders once again. A golden parachute might also constitute a reward for failure when management hastens to sell the company in the wake of a plummeting stock value.To the extent that adoption of golden parachutes might signal future takeover bids, stock values might increase, benefiting shareholders. However, negative market reaction is even more likely, as golden parachutes often signal to shareholders that additional antitakeover measures will follow to prevent the eventual sale of the company.