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PAYING BOARD NOMINEES TWICE: Hedge Funds Set to Offer Bonuses to Preferred Candidates

Tuesday, Dec. 3, 2013

As more and more hedge funds are getting their preferred candidates on the board of directors, a new trend has emerged: some hedge funds are offering their candidates a bonus in addition to the traditional compensation offered by the company. While there has yet to be a director who has taken up one of these offers, corporate governance commentators are already up in arms over the potential pitfalls. Detractors are calling the practice a "golden leash" that will inevitably lead to a conflict of interest, leaving it up in the air who the director is really working for. The hedge funds have responded that because the bonus will be tied to company performance it suits everyone's best interest, and that the additional incentive will help attract better, and more devoted, directors. Are hedge funds entitled to compensate preferred candidates? What is in the best interest of shareholders?

  Kirk: I believe this arrangement will create a conflict of interest, even with the bonus being tied to company performance. Board members owe their allegiance to all of the company’s shareholders, not just the hedge funds with money to throw their way. Where things get complicated is when a hedge fund employee is also serving on the board of a company that the fund has invested in. In this case, the hedge fund is free to compensate the employee, but only for the service and benefits attributed to the hedge fund. Hedge funds should not be compensating the board member on behalf of the company. If each party picks up their own tab, the conflict of interest concern is resolved.

  Patrick: My concern is with the economic incentive placed on the director to manage for the short term. “Maximizing shareholder value” leaves a lot of questions unanswered: Which shareholders? Maximize shareholder value today, this year, or ten years from now? Activist hedge funds are notorious for going after short-term gains, regardless of the effect on the long-term health of the company. Such is their right, but these bonuses serve to align the director’s goals and time horizon with that of the hedge fund: get the stock price up in the near future and get your bonus. 

A Debate Over Paying Board Nominees of Activist Funds (NY Times)

A Framework for Thinking Ethically (Markkula Center for Applied Ethics) 

 

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Comments Comments

Jo Malone said on Dec 3, 2013
I am not comfortable with a bonus offered to hedge fund nominees. How is their role at the company different from non-hedge nominees? Are they in a position to guarantee increased performance? How? Whom are they taking direction from, hedge fund or the company? Are all shareholders interests considered? I see a conflict of interest between the hedge fund nominees, non-hedge fund nominees, and the company in the long run. Leave the compensation to the company. It appears the hedge fund is attempting to obtain more control than its investment would allow. - Like - 1 person likes this.
Patrick Coutermarsh said on Dec 4, 2013
Well said, Jo. Kirk and I share your concern. It'd be interesting if a hedge fund offered a bonus to all board members, regardless of whether they were initially backed by the hedge fund. Although the concern about managing for the short term would still be in a play. -Patrick - Like
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