Activist hedge funds are fighting for the right to pay bonuses to directors that they place on corporate boards.
This comes as 33 US companies have amended their bylaws to disqualify any directors that receive payment from outsiders, in the hope of deterring attacks by activist investors such as Carl Icahn, Bill Ackman and Daniel Loeb.
The bans have raised the ire not just of activists but of institutional shareholders, many of whom are sceptical about the motives of the activists but who want to retain the right to choose directors for themselves.
Prominent activists vow they will not back down, and are canvassing support among shareholders and their advisers.
Mr Icahn dismissed concerns that directors paid by activist shareholders would have incentives to act in their own interests rather than those of the company as a whole.
“Why is it all right for a company to give directors free access to planes and hundreds of thousands in board fees and all kinds of perks, yet if I find a Nobel prizewinner who is going to really help a company it is not all right for me as a holder of a lot of stock to give him a share in my profits?” he said.
Existing board directors are just as likely to act against shareholder interests, Mr Icahn added, for example by opposing a takeover of the company.
“If you give a director hundreds of thousands in board fees a meeting and all kinds of perks, he doesn’t have a lot of incentive to see that come to an end.”
Lawyers who defend companies against activist attacks have been pushing the idea of a payments ban this year, and companies including Halliburton, McGraw Hill Financial, Marathon Oil and Wynn Resorts have already amended their bylaws, according to the corporate governance advisory firm Institutional Shareholder Services.
But another activist fund, Jana Partners, argues that existing board directors have often built up substantial shareholdings and stock options, so activists’ nominees would only be compensated in line with other directors.
When Jana nominated directors to the board of fertiliser company Agrium earlier this year, it proposed paying them bonuses based on the company’s performance over the coming years. Elliott Management proposed similar payments to its nominees to the board of Hess, the energy company. Both plans proved controversial: Jana’s nominees lost; Elliott withdrew the scheme.
“Our only real constituency is shareholders,” said Charles Penner, partner at Jana. “If we can convince them that we have a structure that works, then we can get there.”
In November, the organisation advised voting against the re-election of board members at Provident Financial. The California bank had adopted a version of the payment ban that would even have prevented activists from paying a one-off fee to nominees for agreeing to stand for election, currently a widespread practice.
Chris Cernich, director of proxy fight research at ISS, said: “Whether investors are for or against Hess-like compensation, they are unified they want to be able to decide for themselves.”