When executives serve on a company's board, they are often handsomely compensated.
But as activist hedge funds continue to get more of their preferred candidates on the boards of companies, some of the hedge funds are angling for certain directors to be paid twice: once by the company, and once by the hedge funds that supported their candidacy.
In two efforts earlier this year, dissident candidates up for election at the Hess Corporation and the Canadian fertilizer company Agrium—two companies targeted by activists—were offered large bonuses by the hedge funds that nominated them.
At Hess, Elliott Management nominated five candidates to the oil company's 14-member board, saying current management had underperformed. And at Agrium, Jana Partners nominated five directors to a 12-person board. In both cases, the directors nominated by the hedge funds would have received their bonuses only if the companies' stock rose sharply.
None of the activist directors joined the boards with such arrangements in place. The dissident slate at Agrium was rejected, and while some new directors joined the board at Hess, they did so without the extra compensation.
Nonetheless, the prospect of such incentives upset the stuffy world of corporate governance. And the simmering dispute around director compensation from third parties is the latest front in the growing war of influence being waged between activist hedge funds and corporate boards.
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Hedge funds want to compensate director nominees who commit their time and risk a public fight by standing for election to a company board. But companies say that it is not clear who the activist director is really working for—its shareholders, or the hedge fund.
On Tuesday the issue will come into focus again as shareholders of Provident Financial Holdings, a small bank holding company, will decide whether to re-elect three members of the board who unilaterally passed a provision barring the practice earlier this year.