How Corporate Governance Is Made: The Case of the Golden Leash

54 Pages Posted: 24 Jul 2015 Last revised: 18 Mar 2016

See all articles by Matthew D. Cain

Matthew D. Cain

Berkeley Center for Law and Business

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Sean J. Griffith

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy; European Corporate Governance Institute

Date Written: 2016

Abstract

This Article presents a case study of a corporate governance innovation — the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them. The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries — activist investors, institutional advisors, and corporate law firms. The golden leash also presents an opportunity to test the response of share prices to governance innovation. We conduct two cross-sectional event studies around key dates that affected the availability of the golden leash. Our core finding is that share prices of those firms facing activist intervention reacted positively to events that make golden leashes more available and negatively to events that make golden leashes less available. Moreover, we find that this governance innovation did not affect every firm in the same way. Only the share prices of those firms most likely to be subject to activist attention experienced statistically significant share price reactions. Our research contributes to the debate over how corporate governance is made and its economic significance. Although we find that corporate governance provisions may be priced, at least in some circumstances, our study also suggests that corporate governance is a complex story involving the actions and reactions not merely of the firm and its shareholders but a variety of intermediaries and interest groups that have agendas of their own.

Keywords: Corporate governance, corporation law, activist-nominated directors, director compensation, golden leash, shareholder activism, activist investors, institutional investors, event study, share pricing, governance innovations

JEL Classification: G23, G34, K22

Suggested Citation

Cain, Matthew D. and Fisch, Jill E. and Griffith, Sean J. and Davidoff Solomon, Steven, How Corporate Governance Is Made: The Case of the Golden Leash (2016). University of Pennsylvania Law Review, Vol. 164, P. 649, 2016; U of Penn, Inst for Law & Econ Research Paper No. 15-26; UC Berkeley Public Law Research Paper No. 2635161. Available at SSRN: https://ssrn.com/abstract=2635161

Matthew D. Cain

Berkeley Center for Law and Business ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Jill E. Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

Sean J. Griffith

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
372
rank
77,291
Abstract Views
2,326
PlumX Metrics