It looks like “spring loading” stock options grants may not create the same media and regulator panic we saw when the Wall Street Journal’s backdating story was roiling board rooms.
Even Mark Maremont, who authored the story on the front page of today’s Wall Street Journal, is taking a balanced approach. On DealJournal—the WSJ’s deal blog—Maremont talks to David Yermack, a finance professor at New York University’s business school, who says it might not be so bad to “bribe” executives into going along with mergers.
You’ll recall that this morning’s Wall Street Journal reported on companies that awarded unusual stock-option grants to their executives during merger talks. These options were often worth millions when the deal finally closed.
Yermack, who is credited for first uncovering the practice of stock-options timing by companies more than a decade ago, says handing out pre-deal grants isn’t much different from golden parachutes or special deal-related bonuses. Such goodies tend to smooth the way for CEOs to agree to sell their businesses, he says, rather than fight to hang on to their well-paid jobs.
“You have to ask the question, would the CEO have advanced the deal if he hadn’t gotten a payoff?” Yermack says. “This may resemble what’s been done with the tacit agreement of shareholders for a long time.”
This is precisely the point we raised this morning. The interests of executives at acquisition targets are divorced from their shareholders because their fortunes are closely tied to the performance of their single firm while the fortunes of shareholders tend to be much more diversified.
This works fine in ordinary circumstances—shareholders benefit from self-interested executives trying to out-perform each other—but can create problems in acquisition contexts, when executives can resist deals that would benefit shareholders.
Finding ways to pay executives extra to sell the company can realign their interests with shareholders. As Yermack points out the real problem here seems to be one of disclosure—these arrangements are often obscured in multiple filings and hard to detect by most shareholders. Then again, we’re not sure how much ordinary shareholders actually care about this, so the disclosure issue might not be as big of a deal as it seems.
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