Influential Proxy Adviser Expresses Cautious Support for Activist Director Compensation and Explores Potential Issues with Similar Arrangements

Activist hedge fund managers frequently nominate directors to serve on the boards of target companies and seek to compensate those director nominees in order to attract top talent and ensure that those nominees perform.  However, special compensation arrangements have led to growing debate, with supporters asserting that these arrangements align the interests of activist nominees and shareholders and opponents arguing that they instead engender short-term thinking and result in dysfunctional boards.  See “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target?  An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).  In a recent report, an influential proxy adviser expresses its support “with caution” for a compensation arrangement involving directors that an activist investor placed on the board of a target company.  After discussing the background and details of the director compensation arrangement, the report analyzes the merits of the arrangement in light of certain potential objections and then highlights several additional factors shareholders may wish to consider when evaluating future compensation arrangements.  This article examines the key points in the report with respect to the activist-nominated directors and their compensation structure.

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