Shareholder activism and director retirement plans repeals

Abstract

We study proposals to repeal a potentially non-incentive compatible feature of outside director compensation contracts - director retirement plans. The reason for concern is that the required vesting period to receive benefits may instill complacency in director oversight. In the past, such pension plans were a common feature of compensation contracts until the mid-1990's when shareholder attention shifted away from governance and toward compensation issues. Many firms removed/amended their plans voluntarily or from shareholder pressure. In a sample of 70 firms targeted by shareholders, we find no appreciable benefit to activist efforts to remove director retirement plans. This result holds regardless of the sponsor type (individual, institution or coordinated activism). However, relative to a control group, sample firms display lower levels of outside director oversight. There is also evidence that higher institutional ownership and poor prior performance increases the likelihood of a firm amending/removing its director pension plan. In addition, target firms significantly underperform standard market benchmark and mirror returns of control sample prior to event period. These results generally persist in the post-event period. Collectively, these results are consistent with the majority of the activism literature in that no discernible improvement in performance is detected. Our results have important implications to policymakers about the role of shareholder activism.