December 10, 2014

Golden Leashes Back on the Board Table

Here’s an excerpt from this blog by Donna Dabney of The Conference Board:

On November 20, 2014, Dow Chemical Company entered into a settlement agreement with Third Point, a New York based hedge fund, to increase the size of its board and add two directors retained by Third Point as advisors. Dow had previously rejected Third Point’s nominees because of a “golden leash” pay plan which would entitle Third Point’s nominees to significant compensation from Third Point for their service on Dow’s board. According to proxy disclosures filed by Third Point, each of Third Point’s two nominees would receive $250,000 for agreeing to serve as a nominee, and each would receive an additional $250,000 payment if appointed as a director, which would be invested in Dow stock. In addition, each nominee would receive two additional cash payments from Third Point based on the appreciation of approximately 396,000 shares of Dow common stock following October 2, 2014. The first stock appreciation payment would be calculated in connection with the average selling price of Dow’s stock during the 30 day period prior to the third anniversary of service on the board, and the second payment on the fifth anniversary. The incentive compensation reportedly was not contingent on Third Point continuing to own Dow stock over this period.

Third Point acquired a 2.5% stake in Dow in January 2014 advocating for a spin-off of the company’s petrochemical businesses. According to FactSet, Dow took several actions to increase dividends, expand its share repurchase program and sell assets to raise cash to buy back more shares, but these actions did not satisfy Third Point, which announced on November 13 that it intended to launch a proxy contest. A week later, Dow entered into a settlement agreement with Third Point forestalling a proxy contest and agreeing to nominate Third Point’s nominees with the disputed pay plan in place.

Last year when similar pay plans were proposed by activist hedge funds, there was a considerable amount of discussion and concern about the propriety of such payments, but there has not been a similar reaction to the Dow/Third Point case. In one case in 2013, the proposed nominees waived their rights to incentive compensation after push back from institutional investors (Hess and Elliott Management) – and in another case the activist was unsuccessful in its efforts to place its nominees on the board (Agrium and Jana Partners). What is the difference in public reaction now?