[Viewpoint] Who Are Golden Parachutes Really For?

Nam Gil-nam, Director of the Capital Market Office, Korea Capital Market Institute

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Looking back at the 2022 shareholders' meetings as the regular shareholders' meetings of December fiscal year-end corporations have concluded, it is evident that conflicts over amendments to the articles of incorporation between management and minority shareholders were repeated this year as well. In particular, among bio companies, there were several attempts to include golden parachute provisions?management protection measures that grant executives large sums as consolation payments separate from severance pay when CEOs and key executives are forced to resign due to hostile takeovers?in the articles of incorporation.

For example, one bio company added a clause to its articles of incorporation that provides a director who steps down due to a hostile takeover with severance pay amounting to 20 times the regular severance amount. Another bio company, despite having sales of only 23 billion KRW, agreed to pay 20 billion KRW to a CEO who resigns mid-term and 10 billion KRW to other inside directors as compensation. Moreover, these companies made it so that amendments to the articles of incorporation could only be made with 80% approval of shares attending the shareholders' meeting and 75% of total issued shares, making it difficult to remove golden parachute provisions. Considering that the largest shareholders and related parties hold only about 10-20%, external shareholders would need to acquire or be delegated voting rights for nearly all shares traded in the market to amend the articles, making it almost impossible to abolish golden parachute clauses without the help of controlling shareholders.

Excessive golden parachute provisions ultimately lead to the deterioration of corporate value. Even if the justification is to prevent hostile takeovers, if the cost of replacing management becomes extremely high, executives become protected from any managerial mistakes. When corporate value declines due to poor management, the company should be able to attempt a turnaround with new management, but in companies where failed executives have firmly entrenched themselves, only minority shareholders bear the investment losses unilaterally.

To prevent this, the board of directors, which is primarily responsible for checking management, must be able to assess the appropriateness of golden parachute provisions. Studies on U.S. companies show that boards of companies adopting golden parachutes tend to have low independence, and the situation is even worse for listed companies in Korea. Among bio companies that introduced golden parachutes this year, some had only one outside director, making it difficult to expect the board to fulfill its role.

Another powerful means to check excessive adoption of golden parachutes is the Say-On-Pay vote on key executive compensation, adopted in 13 countries including the U.S. This requires approval of the CEO and other key executives’ compensation at the regular shareholders' meeting. Although it is a non-binding procedure, it is globally recognized as an effective tool to curb excessive pay and overly generous golden parachute conditions, and its introduction in Korea is necessary. Alternatively, large pension funds could avoid investing in companies with management protection articles through their investment guidelines, or ESG rating agencies could penalize such companies in their evaluations, thereby exerting external pressure.

However, it is positive that this year, active solidarity among common shareholders led to cases where management voluntarily abolished golden parachutes or new proposals were rejected at shareholders' meetings. Even without additional regulations, the awareness of minority shareholders and the emergence of activist investors have restrained management’s unilateral decisions. Ultimately, to prevent golden parachutes that benefit only controlling shareholders, institutional responses are necessary, but investor self-awareness is also required.

[Nam Gilnam, Director of Capital Markets Division, Korea Capital Market Institute]

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