In the past few years, much attention has been paid to the issue
of special compensation arrangements sometimes paid by so-called
activist shareholders to their director nominees in proxy fights.
Activists claim that these arrangements provide appropriate
compensation for insurgent director nominees and are necessary to
recruit qualified candidates for board service, particularly in the
case of a contested election. Companies argue, however, that the
payment of incentive compensation by a sponsoring shareholder
establishes a two-tiered compensation structure for the board,
creates dissension in the boardroom, and fosters continuing
allegiances between the director and the activist shareholder
following the election. Further, if the sponsoring shareholder has
a short-term investment horizon, these arrangements may incentivize
the director nominees to focus on the activists' interests or
short-term goals at the expense of long-term value creation for all
shareholders. As counsel to Corporate America, we firmly believe
that these special compensation arrangements improperly incentivize
activist-sponsored candidates and undermine boardroom
stability.
Some companies have attempted to address the issues relating to
special director compensation payments by adopting corporate bylaws
that expressly prohibit third-party payments to directors for board
service other than the typical retainer, expense reimbursement, and
indemnification offered to director candidates. Proxy advisory
firms such as ISS, however, have resisted bars on these types of
special compensation arrangements, claiming that they restrict
shareholders' ability to nominate and elect directors in a
proxy contest, and thus infringe on the shareholder franchise. ISS
has said it would not object to mandated disclosures of these types
of arrangements.
Most recently, Nasdaq has joined the debate. Nasdaq is expected to
propose new rules requiring disclosure of any compensation
arrangements with individuals who serve as dissident director
candidates. We applaud Nasdaq's efforts to put sunlight on this
so that shareholders can make an informed decision as to whether
these compensation arrangements will harm boardroom dynamics and
whether an activist's director candidates will be financially
incentivized to the preferences of a single constituency through
separate compensation. We hope sunlight becomes the disinfectant
that will rid Corporate America of these two-tiered director
compensation structures, encouraging all board members to align in
their focus on the long-term prospects of the company and the
interests of shareholders as a whole.
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