Thought Leader: 'Golden Coffins' Come Back to Haunt Some Companies

In recent days, we have been inundated with sensational coverage of lucrative benefit packages to be paid to executives or their estates upon their death. These so-called “golden coffins” are generally contractually stipulated arrangements that range from salary continuation and life insurance payments to accelerated vesting of equity, often a big-ticket item for long-tenured executives.

These arrangements are yet another example of how times are changing in the world of corporate governance. It does seem that some of the most striking examples highlighted in recent media coverage are the result of legacy deals cut years ago, during the days when smoke-filled rooms obscured what may very well have been decisions based on well-intentioned business or estate planning goals which shaped the agreement.

It is a lost opportunity if companies do not take advantage of the CD&A to explain what they were thinking when they struck the deal, why it made sense then, and, perhaps most importantly, why it continues to make sense now. -Steven Hall

It should be noted that we do not see these benefits--nor would we expect to--in today’s employment contracts. In fact, we are in the midst of a slow-moving but likely inevitable trend towards a general tightening of contractual terms. Severance multiples are declining, restrictive covenants are far more common, and compensation arrangements are designed to be clear and able to withstand the test of reasonableness necessitated by proxy disclosure.

Today’s interested parties, girded by enhanced SEC disclosure mandates and a general change in corporate governance mores, are shining a very bright light on these historical deals, and directors need to justify any benefits and perquisites given exclusively to senior management.

Thankfully, companies have a ready forum in which to defend their actions.

It is a lost opportunity if companies do not take advantage of the CD&A to explain what they were thinking when they struck the deal, why it made sense then, and, perhaps most importantly, why it continues to make sense now. It is also important to remember that the negotiation of employment contracts is more art than science, and these documents are often carefully crafted to balance the needs and desires of both the corporation and the executive.

While directors should certainly re-examine these provisions, it may be that modifying an existing contract opens a Pandora’s box better left shut. Perhaps the time to fix the issue is upon the negotiation of the next contract. In the current climate, while the acceleration of some or all outstanding unvested equity upon death may be a matter of corporate conscience, companies that negotiate with senior executives who seek to provide for their families upon their demise may need to limit themselves to buying traditional life insurance policies or providing executives with additional pay to permit them to purchase coverage on their own.

As the media attention this week confirms, golden coffins are problematic from a cosmetic point of view. In today’s world, we need to accept that directors are not only judged by their actions, but also by how those actions are perceived by an increasingly engaged and enraged public which often views directors and corporations as guilty before proven innocent, particularly on matters of corporate governance and executive compensation.

(Directorship's Thought Leader series provides experts a platform to provide their views on issues making news.)