EXECUTIVE BAILOUT AT SHAKE & SPEAR, INC. Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 217 EXECUTIVE BAILOUT AT SHAKE & SPEAR, INC. Patricia B. Sanders, Central Connecticut State University John F. Veiga, University of Connecticut John N. Yanouzas, University of Connecticut ABSTRACT This exercise examines interactions between top management and the outside board of directors in developing executive compensation policy. The exercise focuses on two behavioral properties of memo writing: to compare the differential effects of responding to memoranda with and without carbon copies to important people; and, to examine when and under what circumstances it may or may not be strategically appropriate to put policy development on sensitive matters into writing and the possible consequences of both a written and unwritten history of policy evolution. This exercise addresses ethical, legal and economic implications of “golden parachute” compensation for a top management team. DIRECTIONS 1. You are a member of the compensation committee of the board of outside directors of Shake and Spear, Inc. Select a person to chair your committee. This person will serve as a spokesperson for your team. Then do the following: (1) read the background information on Shake & Spear, Inc.; (2) read the memo from the Chairman of the Board to the chair of the compensation committee; and (3) read the report on “golden parachute” compensation from the Research and Development Department. 2. Your task is to: a. write a memo to the Chairman as to how he should respond to Bill Spear and b. write a memo on golden parachute compensation policy recommendation to be present at the monthly Board of Directors meeting. You have 50 minutes to complete this task. BACKGROUND INFORMATION ON SHAKE & SPEAR, INC. - Shake & Spear, Inc. was established in 1892 in Venice, New York when Anthony Shake, a dry goods merchant from New York City and William Spear, a sporting and camping manufacturer in Venice, merged. Thus began a long history of expansion through small acquisitions. Its prize possession is its health care division originally acquired during World War I. As a result, today Shake & Spear is a large and highly diversified international company. It has a history of superior management, quality products, good customer relations and proud company employees. Shake & Spear went public in 1939, but the majority of its stock is still held by family members and Bill Spear, Jr. still sits on the Board of Directors. In addition, the company is still largely run by third and fourth generations of Shakes and Spears. The Board of Directors is composed of twelve members, nine Outside directors, and three inside directors. The current President and Chief Executive Officer is William Spear, III, grandson of one of the founders. Next in line is Marcia Shake, Executive Vice President and grand niece of Anthony Shake. In fact, five of the top management positions are filled by direct descendants of Mr. Shake and Mr. Spear. Though public, it is really a “family” run business--and Bill Spear would like to keep it that way, since his oldest son has just come to work for the company after finishing his MBA at Harvard. Over the past decade, Shake & Spear has been a prime target for take over. It is a highly successful company with a reputation of being “ahead” of its time and always a jump ahead of the competition. Its health care products division has been the prime target for takeover. Bill Spear has been president and CEO for the past eleven years and is credited with repelling takeovers. He is very innovative, entrepreneurial and the company expanded internationally under Bill’s tenure. He is dedicated to keeping the business in the “family.” Bill recently asked Portia Shake, the Vice- President for Research and Development, to do some intensive research on change of control compensation packages currently in effect in large business and industry. Bill is convinced that such compensation packages are a strategic tool in increasing the price of a takeover so that potential raiders have to rethink their plans. Exhibit 1 SHAKE & SPEAR, INC. To: Leslie Leads, Chair, Compensation Committee From: Gill Martin, Chairman of the Board Subject: “Golden Parachute” Compensation Policy for Top Management at Shake & Spear, Inc. “The quality of stockholder mercy is not strained. It allows executives with ‘golden parachutes’ to dropped as the gentle rain after a takeover attempt. These people are twice blessed. They are blessed if they win, for they keep their companies, their positions, and their compensation. They are blessed if they lose, for they still keep their compensation even if not their jobs.” The above came to me from a colleague who has just gone through some “sticky” golden parachute litigation. --A little levity to accent a very serious matter! Last Tuesday I had lunch with Bill Spear (our regular monthly luncheon meeting where we “informally” discuss important issues). As you are well aware, Shake & Spear has been a target for takeover in the past and we have repelled such efforts. In our conversation, Bill indicated that he got “wind” of a rumor that Touchstone Industries is planning to acquire about 20% of our stock. Developments in Business Simulation & Experiential Exercises, Volume 11, 1984 218 Bill believes that Touchstone will be successful in their efforts. Bill indicated that his top management team is worried about a change in control and would like us to initiate a change in control compensation package for Bill and his top management team. I asked Bill to send me a memo outlining his thoughts and recommendations as to who would be included, but reminded me that our conversation was “strictly off the record.” Bill promised, however, to send along a report on “golden parachute” compensation recently completed by our research department (copy attached). Since such a package would include a minimum of nine people, this could be a hefty sum for our shareholders to bear. I am asking that you and your committee meet and advise me on the following: (1) How should I respond to Bill Spear? and (2) Develop a golden parachute compensation policy recommendation to be presented at our regular monthly Board of Directors meeting on the last Thursday of this month. This will be the only item on our agenda. Thanks. If you have any questions, please don’t hesitate to call. SUMMARY REPORT ON CHANGE IN CONTROL COMPENSATION FOR THE EXECUTIVE MANAGEMENT TEAMS IN AMERICAN BUSINESS AND INDUSTRY The following is an edited version of this report. The full version is available from the authors. Young and Fazan International, an executive recruiting firm, recently examined the proxy statements of 255 industrial companies from the Fortune 500 and Second 500 lists. The study found that 15% offered parachute provisions to top management teams. The following tables are based on a recent survey of Fortune 500 companies with golden parachute agreements (Fortune, December, 1982). See Tables Below Table 1 Largest Industrials With Parachutes COMANY FORTUNE 500 RANK SALES in billions Phillips Petroleum Sun United Technologies Ashland Oil Allied International Paper American Can Bendix 15 17 20 35 55 77 81 86 $16.0 $15.0 $13.7 $ 9.3 $ 6.4 $ 5.0 $ 4.8 $ 4.4 Table 2 Most Generous Agreements COMPANY CHIEF EXECUTIVE NWNT In millions* American Family GK Technologies Conoco Bendix Thiokol Allied Pennzoil American Medical Int’l Time Inc. John Adams Robert Jensen Ralph Bailey William Agee Robert Davis Edward Hennessy J. High Liedtke Royce Diener J. Richard Munro $ 7.8 $ 7.3 $ 4.1 $ k.0 $ 4.0 $ 3.9 $ 3.7 $ 3.1 $ 3.0 Processing Questions 1. Summary of responses. Differential effects between memo with a carbon copy and memo without a carbon copy. Memo Summary of Responses Memo 1 Memo 2 With Carbon Copy Without Carbon Copy 2. How did your committee deal with the issue of Bill Spear’s request as being “strictly off the record.” 3. Did your team recommend that the Chairman of the Board not respond in writing to the company president? Why or why not? 4. Did your committee send a carbon copy of their memoranda to any other parties? If so, to whom? 5. What are the economic, legal, ethical, and discretionary responsibilities of golden parachute compensation? Social Responsibility Categories Table 3 Most People Covered COMANY PROTECTED EXECUTIVES Beneficial 234 Kimberly-Clark 80 United Technologies 64 Colt Industries 30 Martin Marietta 28 Mapco 23 PèF 21 art 20 Table 4 Fastest-Opening Parachutes (20% change of ownership triggers benefits) COMANY BIGGEST STOCKHOLDERS PERCENTAGE HELD Mohasco Gulf & Western 23.5% Olin Hartford National 15.9% McNeil Richard A. Michelson 15.2% C. R. Bard International Paper 14.3% Control Data Morgan (J. P.) & Co. 9.3% Rubbermaid Balke & Co. 9.0% Tampax Endowment Mgt. & Research 7.6% Midland-Ross T. Rowe Prioe Associates 9.6% Table of Contents Volume 11, 1984 Simulation Gaming as a Means of Researching Substantive Issues: Another Look A Further Test of the Group Formation and its Impacts in a Simulated Business Environment Impact of Economic Patterns on Student Performance in Computer Business Simulation Games Majority Fallacy Game with Independent Student Simulation and a Case Introducing the Marketing Channel Laboratory A Comparative Evaluation of a Marketing Game A Study of Comparative Effectiveness of Problem-Solving Technologies The Impact of Hierarchical and Egalitarian Organization Structure on Group Decision Making and Attitudes Risk-Free Decision Making The EX-STRA Export Strategy Game Computer Education for Management Students Developing a Computer Game/Job Simulation to Teach Functional Literacy Skills Experiencing Socialization First Hand: An Experiential Exercise in Organizational Socialization Networking Distributive Versus Integrative Approaches to Negotiation: Experiential learning Through a Negotiation Simulation Managerial Education and the Real World: Foudations for Designing Educational Tools Diagnosing Group Climate to Improve Supervisory Effectiveness Student background as a Factor in Simulation Outcomes: The Collective bargaining Example The Use of Pre-Plays in Management Education Experiencing the Process Debrief: A Workshop ABSEL Megatrend Roots MEGATRENDS for Business Simulation and Experiential Learning The Effects and Consequences of the Megatrends on Simulation Gaming: One View Opportunities for the Future: ABSEL's Role Experiential Learning-Based Discussion vs. Lecture Based Discussion: A Comparative Analysis in a Classroom Setting An Evaluation of the Minitab Package in Teaching Business Statistics Concepts A Path Analytic Study of the Effects of Alternative Pedagogies Developing and Using Weighted Application Blanks: An Experiential Exercise Building Airplanes Individual vs. Group Grade: An Exercise in Decision making A Marketing Plan Exercise: Development of Interteam Cooperation Using a Coordinated Experiential Approach Using Student Experience as the Basis for a Consumer Behavior Learning Exercise Student Evaluations of Instructors: What do Students Believe? A Description of the SOFTCAT Computer Assisted Teaching System Comparisons of Practitioners' and Professors' Perceptions of Business Policy Content and Learning Methods The Perceived Relationship Between Pedagogies and Attaining Course Objectives in the Business Policy Course The Use of Simulation in the Teaching of Business Policy A Research Study on Strategic Decisions in a Business Simulation Strategic Management Decision Making Researched Via Simulation Gaming Using Simulation to Investigate Factors in Competitive Bidding Combining Experiential Learning and management Assistance A Model for Teaching Management Skills Putting Experience Back into Experiential Learning: A Demonstration The Teaching and Behavioral Measurement of Managerial/Organizational Competencies: Developing Experiential Exercises and Simulations A Simulation Game Model for Conglomerates QCLAB - A Microcomputer Laboratory in Quality Control CTSS: A Commodity Trading Simulation System Problem Solving: An Exercise on Learning, Coaching, and Operant Conditioning A Demonstration of the Effects of Feedback as a Category of Reinforcement The Assessment of Feedback and Disclosure in Interpersonal Relations: An Experiential Exercise A Study to Determine Whether the Teaching of Basic Grammar Skills in Business Communication Classes Improves Students' Business Letter Writing Corporate Maladies Through the Eyes of the Memo Writer: A Seldom Used Experiential Tool Executive Bailout at Shake & Spear, Inc. The H.E./L&P Merger Intercultural Nonverbal Communications: An Experiential Exercise The Evolving Business Policies Course - Is Management Gaming the Logical Pedagogy? The Use of Decision Simulations in Management Training Programs: Current Perspectives Humanizing the Business of Medicine: The Use of Simulated Patients to Train medical Students Systematic Integration of Simulation Methods in a Graduate Management Curriculum Modeling Non-Price Factors in the Demand Functions of Computerized Business Using Spacial Relationships to Estimate Demand in Business Simulations Two Algorithms For Redistribution Of Stockouts In Computerized Business Simulations Leadership And Strategic Behavior A Comparison Of Two Business Strategy Simulations For Microcomputers Incorporating Decision Support Systems Into Management Simulation Games: A Model And Methodology Using Micro-Computers To Support The Analysis Of Complex Cases: It's As Easy As 1-2-3 Strategic Formulation Consistent With Pims: A Micro-Computer Application