Scheme Misaligns Board Interests and Creates Significant Risk for Hess and Its Shareholders
…[w]e are strongly opposed to the Dissident's compensation arrangements and maintain such agreements introduce a troubling and, in our view, wholly unnecessary potential for board room conflict…
The Dissident may not revoke these payments at a later date if, by chance, it becomes unsatisfied with its Nominees. While this may provide the appearance that the Dissident Nominees are not beholden to Elliott's interests, we nevertheless find these agreements problematic. In particular, contests of this nature already introduce significant risks associated with the prospect of a fractured boardroom, the potentially adverse impact of which we believe shareholders must seriously consider as part of any final vote determination. By extension, we find agreements of this nature, which essentially establish a two-tiered compensation structure for the same oversight role, offer little chance of reducing the foregoing risks and may, in fact, foment further discord between the incumbent board members and Dissident nominees.
Clearly it is inexplicable actions like this by
Included below is the full text of Professor Coffee’s article, “Are shareholder bonuses incentives or bribes?”
“This is the heyday of institutional investor activism in proxy
contests. Insurgents are running more slates and targeting larger
companies. They are also enjoying a higher rate of success: 66% of proxy
contests this year have been at least partially successful. The reason
is probably the support that activists have received from the principal
All this may be well and good. Shareholders certainly have the right to throw the incumbents out at underperforming companies. But there may also be a dark side to this new activism.
This year, two activist investors—Elliott Management Corp. and Jana
Partners—have run minority slates of directors for the boards of
Both Hess and
This claim that incentive compensation aligns the nominees’ interests
with those of the shareholders ignores much. First, there are timing
conflicts. Two years from today, a bidder might offer a 50% premium (
Among academics, the currently trendy theory is that activist investors are the true champions of shareholders and should not be limited in the tactics by which they seek to maximize value. Unquestionably, share ownership has re-concentrated over the last two decades. Today, few, if any, barriers remain to the ability of institutional investors to enforce their will. Staggered boards are being eliminated, and poison pills redeemed, across the face of Corporate America. Yet, given their new power, activists do not need the additional ability to bribe their nominees into compliance with their wishes. Rather, with greater power should come greater responsibility and a decent sense of restraint.
So what should be done? Special bonuses to selected directors are not
inherently unlawful; nor are they fraudulent if full disclosure is made.
But a director significantly compensated by third parties should not be
seen as an “independent” director. Here, the law needs to evolve. The
Dodd-Frank Act imposed new requirements that board committees have
independent directors, but it looked to the definitions of independence
used by the major stock exchanges. Those rules understandably focus on
whether the director is “independent of management.” In the new world of
hedge fund activism, we need to look to whether individual directors are
tied too closely by special compensation to those sponsoring and
nominating them. Once we recognize that compensation can give rise to a
conflict of interest that induces a director to subordinate his or her
own judgment to that of the institution paying the director, our
definition of independence needs to be updated. Although not all
directors must be independent, only independent directors may today
serve on the audit, nominating, or compensation committees. This issue
of redefining independence should be high on the agenda of both the
Next, the propriety of third party compensation to directors should be
openly faced by the real players in corporate governance today: the
The great irony here is that the Dodd-Frank Act restricted incentive compensation to executives at major financial institutions precisely because such compensation was thought to have led to the short-termism and perverse incentives that produced the 2008 financial crisis. But no one thought about director compensation, which can do the same. Today, we are at the crest of an immense slippery slope. If legitimized, these new compensation tactics will likely be used in a broad range of control and proxy fights, with the long-term result being a shift towards greater risk and leverage.
In fairness, incentivizing directors may often be appropriate, but the simplest and best means to this end is through equity awards issued by the corporation. Corporate stock or option awards treat directors alike and avoid giving them differing time horizons and incentives, because the stock price automatically trades off short and long-term value. Third party bonuses create the wrong incentives, fragment the board, and imply a shift towards both the short-term and higher risk. As with other dubious practices, 50 shades of grey can be distinguished by those willing to flirt with impropriety. But ultimately, the end does not justify the means.ii”
These directors have already “earned”
The Board recommends that shareholders vote for the election of Hess’ highly qualified independent nominees on the WHITE proxy card.
For information about Hess’ transformation and the 2013 Annual Meeting, please visit: www.transforminghess.com.
This document contains projections and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These projections
and statements reflect the Company’s current views with respect to
future events and financial performance. No assurances can be given,
however, that these events will occur or that these projections will be
achieved, and actual results could differ materially from those
projected as a result of certain risk factors. A discussion of these
risk factors is included in the Company’s periodic reports filed with
This document contains quotes and excerpts from certain previously published material. Consent of the author and publication has not been obtained to use the material as proxy soliciting material.
Important Additional Information
1 Bainbridge, Stephen. “Coffee on Side-Payments by Hedge
Funds to Director Nominees.” ProfessorBainbridge.com.
2 Coffee, John C. "Shareholder Activism and Ethics: Are
Shareholder Bonuses Incentives or Bribes?" Columbia Law School Blog on
Corporations and the Capital Markets.
For Hess Corporation
Jay Wilson, 212,536-8940
MacKenzie Partners, Inc.
Dan Burch/Bob Marese, 212-929-5500
Jon Pepper, 212-536-8550
Sard Verbinnen & Co
Michael Henson/Patrick Scanlan, 212-687-8080