April 03, 2013
Of Directors and Pay
Posted by Usha Rodrigues

From yesterday's Deal Professor comes Steven Davidoff on the "newest trend in activist investing": hedge funds incentivizing their directors by paying them extra if they win a seat and the company takes off.  For example, Elliott Management has nominated 5 directors for the Hess Corporation.  If any win a seat and Hess stock outperforms a peer group, the directors could make $9 million over 3 years.  Jana Partners is offering its nominees a similar deal for serving on Agrium's board, again for a potential of millions if it profits.  Plus both funds offer a $50,000 retainer, over and above whatever the directors collect from the companies themselves, likely a six-figure director fee.  

In John Steinbeck's East of Eden (Go out and read it if you haven't already.  Now.  Go), one character says "You can't make a race horse of a pig."  "No," replies another, "but you can make a very fast pig."  For my money, these hedge funds are trying to make a faster pig.  I know this is activist hedge fund's m.o.: get seats on the board, make quick changes, see stock rise, sell.  But today's public company board, composed of independents who are by definition part-timers, shouldn't be making managerial calls at all.  They should only take action when there's a conflict with management.  Or so I argue in A Conflict Primacy Model of the Public Board.

Allowing boards to manage gives hedge funds an in, and creates problems like, in Davidoff's words:

this kind of pay arrangement sets up two classes of directors doing the same job but being paid very different amounts. It could not only create resentment, but disagreement over the path of the company.

Creating a subclass of directors focused on the short term doesn't sound like a particularly good way to run a company, at least to me.



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