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Don’t pull the cord

6 February 2012 By Quentin Webb

Xstrata shareholders are right to fret over Mick Davis’s potential rewards from selling the company to Glencore. The chief executive drives a hard bargain, is a shareholder too, and won’t be the one recommending any merger to outsiders. But there is a potential conflict of interest in that Davis could receive two extra benefits merely for clinching a deal.

First, the Xstrata boss will see three years of “long-term incentive plan” shares vest immediately and in full upon any takeover. If the latest LTIP award is in line with previous years, this element of Davis’s deal will be worth about 8 million pounds. Options worth another 1.8 million pounds net will also vest.

Second, Davis will be entitled to receive a cash payment equal to a year’s pay, bonus and benefits following any “change of control”. The Sunday Telegraph reckons this would be worth another 5.7 million pounds. But it seems unlikely that Davis will actually take this cash. He certainly shouldn’t if he is the new CEO of the merged group. It would be farcical to pull the cord of his golden parachute if he is staying in the cockpit.

Shareholders should draw some comfort from Davis’s significant existing interest. His holdings exceed 55 million pounds once ordinary shares, and vested but unexercised options (less their strike price) are tallied. That helps align his economic interests with other investors’.

Still, the general principle is right. When companies are as entwined as Glencore and Xstrata, merger proposals merit close attention anyway. And parachutes can certainly cloud CEOs’ thinking. In U.S. companies, where independent chairmen are admittedly less common, researchers at Philadelphia’s Drexel and London’s City university have found that the more glittering a CEO’s parachute, the lower the premium offered to shareholders.


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