December 29, 2013 5:29 pm
Activist hedge fund investors in fight
to pay bonuses
By Stephen Foley in New
Activist hedge funds are fighting for the right to pay bonuses to directors
that they place on corporate boards.
This comes as 33 US companies have amended their bylaws to disqualify any
directors that receive payment from outsiders, in the hope of deterring
activist investors such as Carl Icahn, Bill
Ackman and Daniel Loeb.
The bans have raised the ire not just of activists but of institutional
shareholders, many of whom are sceptical about the motives of the activists
but who want to retain the right to choose directors for themselves.
Prominent activists vow they will not back down, and are canvassing support
among shareholders and their advisers.
Mr Icahn dismissed concerns that directors paid by activist shareholders
would have incentives to act in their own interests rather than those of the
company as a whole.
“Why is it all right for a company to give directors free access to planes
and hundreds of thousands in board fees and all kinds of perks, yet if I
find a Nobel prizewinner who is going to really help a company it is not all
right for me as a holder of a lot of stock to give him a share in my
profits?” he said.
Existing board directors are just as likely to act against shareholder
interests, Mr Icahn added, for example by opposing a takeover of the
“If you give a director hundreds of thousands in board fees a meeting and
all kinds of perks, he doesn’t have a lot of incentive to see that come to
Lawyers who defend companies against activist attacks have been pushing the
idea of a payments ban this year, and companies including
McGraw Hill Financial,
Marathon Oil and
Wynn Resorts have already amended
their bylaws, according to the corporate governance advisory firm
Institutional Shareholder Services.
But another activist fund, Jana Partners, argues that existing board
directors have often built up substantial shareholdings and stock options,
so activists’ nominees would only be compensated in line with other
When Jana nominated directors to the board of fertiliser company
Agrium earlier this year, it
proposed paying them bonuses based on the company’s performance over the
coming years. Elliott Management proposed similar payments to its nominees
to the board of
Hess, the energy company. Both plans
proved controversial: Jana’s nominees lost; Elliott withdrew the scheme.
“Our only real constituency is shareholders,” said Charles Penner, partner
at Jana. “If we can convince them that we have a structure that works, then
we can get there.”
In November, the organisation advised voting against the re-election of
board members at
Provident Financial. The California
bank had adopted a version of the payment ban that would even have prevented
activists from paying a one-off fee to nominees for agreeing to stand for
election, currently a widespread practice.
Chris Cernich, director of proxy fight research at ISS, said: “Whether
investors are for or against Hess-like compensation, they are unified they
want to be able to decide for themselves.”