The Golden Leash and the Fiduciary Duty of Loyalty

56 Pages Posted: 2 Sep 2016 Last revised: 9 Nov 2017

See all articles by Gregory H. Shill

Gregory H. Shill

University of Iowa College of Law; American Bar Foundation; New York University School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2016

Abstract

In recent years, activist hedge funds have begun experimenting with a novel practice in corporate governance: offering their candidates for the board of directors millions of dollars in bonus pay through a device known as a “golden leash.” Such arrangements, which are highly controversial, award directors for accomplishing activist objectives. An emerging body of work views the golden leash through the same polarized lens as activism itself: either the leash locks directors in to a self-serving, “short-termist” agenda, or it creates incentives for them to be better advocates for shareholders. This binary framing obscures some of the golden leash’s most promising qualities.

Though novel and associated with shareholder activists, the golden leash belongs to a larger class of well-established, mainstream legal structures that reduce agency costs and increase expertise at individual firms by, paradoxically, tying directors to multiple firms. These structures include corporate governance innovations in two other areas of the capital markets, the venture capital ecosystem and the practice of corporate directors sharing information with outside entities. Like the golden leash, both of these models create overlapping obligations for directors. Yet these arrangements are welcomed by scholars, courts, and firms on the grounds that they improve enterprise value and corporate governance by quietly blending loyalties, notwithstanding the fact that they also make conflicts of interest more likely.

The golden leash thus follows in a coherent, if unheralded, tradition of structures that forge ultraclose bonds between directors and outside shareholders. This Article argues that the risks posed by this blending of duties should be discounted by the availability of mechanisms to manage any conflicts that result and by advantages conferred in capital formation and governance. Properly designed and disclosed, the golden leash can promote not only superior returns but consensus-building, dialogue, and other values important to sound corporate governance.

Keywords: corporate governance, golden leash, shareholder activism, fiduciary, duty of loyalty, hedge fund, director compensation, venture capital, director, activist, confidentiality agreement, information sharing, agency costs, procedural corporate governance, corporate finance

JEL Classification: K00, K22, G34

Suggested Citation

Shill, Gregory H., The Golden Leash and the Fiduciary Duty of Loyalty (August 31, 2016). 64 UCLA Law Review 1246 (2017); U Iowa Legal Studies Research Paper No. 2017-35. Available at SSRN: https://ssrn.com/abstract=2833399

Gregory H. Shill (Contact Author)

University of Iowa College of Law ( email )

Boyd Law Building
Iowa City, IA 52242
United States

American Bar Foundation

750 N. Lake Shore Drive
Chicago, IL 60611
United States

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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