The most publicized proxy battle of 2013, Agrium Inc.’s showdown with activist US hedge fund Jana Partners, introduced the concept of the “golden leash” to the Canadian proxy scene. Jana nominated four independent directors to the board of Agrium, and offered to pay them, on top of their compensation as directors, a percentage of any profits Jana earns on its Agrium shares within a three year period. Agrium’s special committee of the board, represented by Norton Rose Fulbright, raised concerns with respect to this scheme eroding the independence of the Jana nominees by financially “leashing” them to Jana, thus incentivizing them to make decisions that may diverge from the best interests of all of Agrium’s shareholders.
While Jana was ultimately unsuccessful in electing its nominees to Agrium’s board, its tactics were novel in Canada. In contrast, golden leashes have precedence in the activist toolbox in the US. In fact, some target companies in the US have resorted to prophylactic measures against golden leashes. Specifically, some companies have enacted bylaws prohibiting board nominees from receiving third party compensation in exchange for standing for election. In effect, such measures disqualify potential nominees that have accepted fees from the activist shareholder.
On January 13, 2014, Institutional Shareholder Services (ISS) published its policy on such measures by target companies in the Director Qualification/Compensation Bylaw FAQ. ISS’s position is that “the adoption of restrictive director qualification bylaws without shareholder approval may be considered a material failure of governance.” In turn, such a failure may cause ISS to “recommend a vote against or withhold from director nominees for material failure of governance, stewardship, risk oversight, or fiduciary responsibilities.” ISS states that its concern is rooted in preserving the “fundamental shareholder right” of electing directors. ISS’s view appears to be that director disqualification bylaws can undermine voting rights by depriving shareholders of potential nominees, and can therefore represent bad corporate governance if they are not backed by the shareholders.
Given the often critical role ISS’s recommendations play as a bellwether for the votes of large institutional shareholders, among others, this policy may mean the end of companies enacting protective measures against golden leashes, as noted by Martin Lipton et al. However, it is unclear whether ISS’s new policy is necessary in the first place. Rather than curtailing shareholder votes, measures designed to eliminate golden leashes only curtail the conduct of director nominees. A director wishing to stand for election only has to ensure he or she does not have any compensation agreements with third parties. And, so long as any director disqualification bylaws are disclosed, they would appear to fall within the ambit of powers that a company can lawfully assert without requiring a shareholder vote, unlike, for instance, the enactment of a shareholder rights plan.
ISS’s new policy will certainly not discourage activists in Canadian corporations from increasingly offering financial compensation to their director nominees. Instead, the new policy raises concerns with respect to the ability of shareholders to implement checks on having directors with collateral interests. Part of the purpose of a board of directors is to separate ownership of a corporation from its management—this is the reason director independence is among the core values of corporate governance. ISS’s new policy, while ensuring that shareholders have access to a broader range of director nominees, will disappoint many who are concerned that it may make achieving director independence and minimizing conflicts of interest more difficult.