Page 136 - Introduction to Business

110 PART 1 The Nature of Contemporary Business

the executive for a certain period of time from opening or joining a competing busi-
ness, perhaps within a certain geographic area. For example, a bank might have a
covenant not to compete with its CEO that prohibits the CEO from opening a new
bank within a 100-mile radius of the bank for a period of at least three years after
leaving the organization. This agreement prevents the CEO from using information
gained about customers and so on at his or her old bank and opening a directly
competitive new bank, which would likely damage the old bank and its customers.
golden parachute agreements Most major corporations have golden parachute agreements with their top
Severance payment agreements, often executives that provide special, often fairly lucrative severance payments to
fairly lucrative, to be received by them should they be forced to leave the company in the event of a takeover of
corporate executives if their
corporation is acquired the company by another firm. Often these agreements are coupled with
covenants not to compete for a certain period of time. Ostensibly, these agree-
ments should make top executives more amenable to takeover bids that
enhance shareholders value. Younger CEOs, though, may not find these agree-
ments as lucrative as staying in office. Moreover, younger CEOs may not want to
be forced into retirement (due to the accompanying covenants not to compete)
with its accompanying loss of power at a relatively young age. Thus it seems
unlikely that golden parachutes, unless ridiculously exorbitant, will completely
produce proper alignments of shareholder and executive interests in takeover
bid situations, especially in the case of relatively young top executives. Properly
constructed restricted stock grants probably are one way to provide more posi-
tive alignments in such situations.

Public and Governmental Solutions.
Sarbanes-Oxley Act Federal corporate SARBANES-OXLEY ACT. The federal Sarbanes-Oxley Act became effective in 2003
governance legislation increasing the and adds a new panoply of legal regulation (far beyond the business judgment rule)
duties and liabilities of corporate with respect to corporate executives and directors. The law considerably strength-
officers and directors

President George W. Bush, on July
30, 2002, shakes hands with Sena-
tor Paul Sarbanes (D-Md.), co-
author of the Sarbanes-Oxley Act,
after signing this legislation into
effect. The act strengthens federal
government regulation of corporate
governance. The law’s other co-
author, Congressman Mike Oxley
(R-Oh.), looks on and applauds.

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