I've had my share of differences with Jack Coffee over the years, so it is appropriate to compliment him on his cogent analysis of the growing problem of "incentive" payments being made by hedge funds to their nominees on corporate boards:
This year, two activist investors—Elliott Management Corp. and Jana Partners—have run minority slates of directors for the boards of Hess Corp and Agrium, Inc., respectively, and each has offered to pay special bonuses to its nominees (and no one else). Elliott will pay bonuses to its five nominees measured by each 1 percent that Hess shares outperform the total rate of return over the next three years on a control group of large oil industry firms. A ceiling limits the maximum payment to a nominee director to $9 million. In the case of the Agrium proxy fight, which Jana narrowly just lost, Jana offered to pay its four nominees a percentage of any profits that the hedge fund, itself, earned within a three year period on its Agrium shares.
Both Hess and Agrium have objected that these bonuses are intended to incentivize these nominees to sell the company or promote some other extraordinary transaction in the short-run. The activists, and their defenders, respond that there is no conflict because all shareholders will benefit if the new directors cause each firm to outperform its peers.
This claim that incentive compensation aligns the nominees’ interests with those of the shareholders ignores much. ...
Coffee goes on to shred the claim into rather tiny pieces, before concluding that:
Third party bonuses create the wrong incentives, fragment the board, and imply a shift towards both the short-term and higher risk. As with other dubious practices, 50 shades of grey can be distinguished by those willing to flirt with impropriety. But ultimately, the end does not justify the means.
Precisely right, IMHO. I've previously suggested that such payments probably violate Delaware law and concluded that "If this nonsense is not illegal, it ought to be."
