Takeover Deterrents May Help Company CEOs More Than Shareholders

November 25, 1997

COLUMBUS, Ohio -- Corporate CEOs may propose some takeover deterrents for their companies in order to protect their above-average levels of compensation, a new study suggests.

Researchers found that CEOs of companies that adopted antitakeover charter amendments (ATAs) earned significantly more than other CEOs when the ATAs were adopted.

And in the three years following adoption of an ATA, CEOs of these companies saw their levels of compensation increase relative to their peers.

"The results suggest that CEOs propose antitakeover amendments in part to protect their jobs, and thereby secure above-market levels of compensation," said Kelly Brunarski, co-author of the study and an assistant professor of finance at Ohio State University's Max M. Fisher College of Business.

ATAs are charter amendments which companies adopt to make it more difficult for an unwanted acquirer to take over the firm. ATAs protect CEOs because corporate managers are often replaced when firms are taken over. CEOs may feel their positions are safer under the board that appointed them, Brunarski said. "CEOs probably believe they couldn't make the same level of compensation if their company is a takeover target."

Brunarski conducted the study with Kenneth Borokhovich of Wayne State University and Robert Parrino of the University of Texas at Austin. Their results appear in the current issue of The Journal of Finance.

In this study, the researchers examined 129 U.S. firms that adopted ATAs between 1979 and 1987. They were compared to 129 similar firms that did not have ATAs during that period.

The results showed that ATAs had their desired effect -- the ATA firms were targets of only six takeover bids during the three years following adoption of the deterrent. In contrast, 17 firms without ATAs were takeover targets during the same period.

CEOs of firms that adopted ATAs had total compensation packages that averaged $136,026 more than other corporate leaders ($437,699 vs. $301,673). In addition, CEOs at ATA firms were twice as likely as other managers to be protected by golden parachutes.

"ATAs are proposed by CEOs who, on average, will benefit from the protection these amendments provide for their above-average levels of compensation," Brunarski said.

Moreover, CEOs use ATAs to further help their position. The researchers developed a method to determine about how much CEOs should be paid based on characteristics such as firm size, firm performance, and growth opportunities. Results showed that the CEOs with ATA firms tended to have higher than expected compensation when the deterrent was adopted. And their levels of "excess" compensation actually increased relative to other managers in the three years following adoption.

"This suggests that the protection that antitakeover amendments provide allows CEOs to extract even higher levels of compensation from their companies," Brunarski said. "Our evidence implies that the overall effect of ATAs is to entrench managers in their positions."

Why do shareholders agree to ATAs when they seem to protect overcompensated CEOs? The results suggest one reason: ATA firms showed superior performance compared to similar firms just prior to adoption of the deterrent. "CEOs seem to time their request for an ATA for when they are in the strongest position," Brunarski said. "Shareholders may be reluctant to vote against an ATA when the firm has been doing well recently."

Since 1987, the last year covered by this study, nearly all states have adopted laws which essentially perform the function of ATAs by making it more difficult for hostile takeover bids. So now, even companies without ATAs are likely to have similar protection through state laws, Brunarski said."It may be that these state laws protecting companies from hostile takeovers are actually benefiting CEOs more than company shareholders," she said.

Ohio State University

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