Servants of Two Masters? The Feigned Hysteria over Activist-Paid Directors

Abstract

Directors of U.S. public firms have been paid for their directorship exclusively by the company in which they serve. Recently, however, activist investors have asked shareholders to elect director-candidates who received a lucrative compensation package from the activist in addition to their compensation arrangement with the company. Incumbent managers and their defenders, such as Wachtell, Lipton, have sharply condemned this practice, terming it a ‘Golden Leash’ that subjects the nominated director to the activist’s control. I explain why these critics are mistaken. Activist-paid directors can be expected to improve corporate performance at poorly performing firms, and the cost of such arrangements, if any, is likely to be much lower than that of similar arrangements that are already widely used throughout corporate America and are welcomed by these critics.

Keywords: Directors, Shareholder Activism, Hedge Funds, Compensation, Corporate Governance, Golden Leash

JEL Classification: G30, K22