I recently received an email from the AFL-CIO Reserve Fund urging a vote in favor (“FOR”) their shareholder resolutions asking Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM), and Morgan Stanley (MS) to issue a report to shareholders disclosing the dollar amounts of government service golden parachutes – pay their senior executives will receive if they voluntarily resign to enter into government service.
The proposal is a good idea. I hope to be following up with posts on how I voted at Citigroup (C) and Goldman Sachs (GS). I do not own any shares of JPMorgan (JPM) or Morgan Stanley (MS). Below is the the AFL-CIO rationale for why “government service golden parachutes” do not serve the interests of shareholders.
What is a Government Service Golden Parachute?
For the purpose of these shareholder resolutions, a government service golden parachute is the accelerated vesting of equity-based awards for senior executives due to a voluntarily resignation to enter government service. In other words, senior executives who enter government service will receive equity compensation that they would otherwise forfeit for failing to meet the employment period or performance vesting requirements of their equity compensation.
How are Government Service Golden Parachutes Unusual?
At many public companies, it is a common practice to provide accelerated vesting of equity awards following a change-in-control. This accelerated vesting of equity awards typically makes up the greatest component of senior executives’ change-in-control golden parachute payments. As a best practice, these change-in-control golden parachutes are “double-triggered,” meaning that the payments are contingent on the executive’s involuntary termination.
In contrast, a government service golden parachute is trigged after the voluntary resignation of an executive to pursue an alternative career in government service. To our knowledge, the provision of government service golden parachutes is unique to Wall Street banks. We are unaware of any other industry where accelerated vesting of equity is permitted outside of a change-in-control, nor is this prerequisite provided at certain bank competitors like Wells Fargo.
How Do Government Service Golden Parachutes Harm Shareholders?
At most companies, equity compensation is used as an employee retention and motivation tool. If you don’t satisfy the employment conditions for vesting, you don’t earn your equity awards. Why should departing executives receive a windfall payment to enter government service, while remaining employees must continue to meet the vesting terms of their equity awards?
Equity compensation plans should be designed to retain executive talent, not encourage executives to resign from the company. While entering government service is a laudable career choice, we question why shareholders should subsidize the second career choices of executives. Such an arrangement appears to be a wasteful prerequisite that is unrelated to performance.
Government Service Golden Parachutes Raise Troubling Questions
The provision of government service golden parachutes also raises troubling public policy and ethical questions. How do Wall Street investment banks benefit from giving their executives a financial incentive to enter government service? Do they expect to receive favorable government treatment from their former executives? These public policy questions may further harm the reputations of Wall Street investment banks that have already been tarnished by the 2007-2008 financial crisis.
For example, Sheila Bair, the former chair of the Federal Deposit Insurance Corp. wrote:
Only in the Wonderland of Wall Street logic could one argue that this looks like anything other than a bribe. Once upon a time, part of the nobility of joining public service was the willingness to make the financial sacrifice. We want people entering public service because they want to serve the public. Frankly, if they need a [golden parachute], I’d rather they stay away. (Fortune, December 5, 2014).
Why is a Report on Government Service Golden Parachutes Needed?
The Securities and Exchange Commission’s proxy disclosure rules only require that golden parachute information be provided for Named Executive Officers (generally the top five executives). Shareholders deserve to know whether government service golden parachutes are being offered to other senior executives. Issuing a report to shareholders will also encourage companies to provide their rationale for providing government service golden parachutes.
The first government service golden parachute shareholder resolution will be voted on at Citigroup’s shareholder meeting on April 28, 2015 and appears as Item #9 on Citigroup’s proxy card. Similar proposals will also go to a vote at Goldman Sachs, JPMorgan, and Morgan Stanley. For more information, contact the AFL-CIO Office of Investment at (202) 637-3900 or by email.
There will be plenty of other interesting proposals from shareholders. Requesting a report on government service golden parachutes certainly deserves our support.