Some activist shareholders want to make side payments to the directors they put on boards. Is that good or bad for the other shareholders? Gregory H. Shill writes:
Traditionally, activist hedge funds identify a company ripe for improvement, acquire a toehold position in the company’s stock, and then launch a campaign to convince shareholders to dump incumbent directors in favor of candidates nominated by the fund. In recent years, some funds have begun experimenting with a variation on this practice by offering incentive pay in the form of bonuses to directors they nominate, over and above the compensation all directors receive from the company for their service on the board. These bonuses, known as “golden leashes,” have further polarized the debate over shareholder activism and short-termism. I examine the phenomenon more critically in a recent article, The Golden Leash and the Fiduciary Duty of Loyalty, recently published in the UCLA Law Review.The case for golden leashes to date has invoked traditional shareholder rights arguments: golden leashes provide opportunities to enhance shareholder wealth and reduce agency costs by creating incentives to drive needed change. The reaction of Delaware judges has been skeptical (as the article details at Part III). In particular, Vice Chancellor Travis Laster suggested in a recent transcript ruling that golden leash arrangements might constitute conflicts of interest per se. See In re PLX Technology Inc. Stockholders Litig., C.A. No. 9880-VCL, at 30 (Del. Ch. Sept. 3, 2015). Some leading corporate law scholars have gone further, likening golden leashes to bribery and urging that they be banned.