Hidden Director Conflicts Should Be Disclosed to Investors

Shareholder campaigns aimed at radically reshaping corporate policy and governance — and extracting short-term profits at the expense of long-term value creation — are once again in the news. Many think they are a recent phenomenon. But that’s not the case.

In 1986 vaunted management consultant Peter Drucker lambasted short-termism in an editorial in theWall Street Journal, declaring, “Everyone who has worked with American managements can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes.”

And the evidence today — the intense focus on quarterly earnings, diminishing capital investment by U.S. corporations, shrinking CEO tenure and, according to Ana Avramovic, director of trading strategy at Credit Suisse in New York, falling average holding period for shareholders to 17 weeks, among other things — continues to demonstrate a push toward decisions that can be costly for shareholders.

This situation is potentially calamitous. Short-termism, often driven by activists, can have grave implications for corporations, for our economy and sometimes for society overall. Innovation, discovery and hiring are curtailed when R&D projects are put on hold or canceled because of short-term pressures. Halted development undermines long-term U.S. competitiveness, to say nothing of potentially postponing lifesaving medicines or cutting-edge technologies from reaching the public. Short-termism also leads to mispricing, misallocation of assets and a lack of reliable information about long-term prospects. But because activists are shareholders, this dynamic puts corporate leadership in a bind. Nobody will disagree that a diverse pool of investors is a goal of any business and that none should be turned away.

Some activist groups today do claim they are in it for the long haul, bringing ideas, questions and concerns to the attention of corporate boards and management, which is an essential part of any healthy relationship between a company and its shareholders. Beyond this engagement by some, however, a movement is afoot in which some board members are paid directly by activist investors, often based on benchmarks such as an increase in share price over a fixed term.

This relation is the case with two directors onDow Chemical Co.与对冲基金公司第三点进行特殊赔偿安排的董事会同意向其支付股票的评估权，因为Dow股票价格上涨。至少，目前尚不清楚该董事的激励补偿安排没有建立明确义务Third Pointat the expense of other shareholders, lead to conflicts on the board that skew the alignment of interests with shareholders and undercut the fundamental board responsibility to oversee management in the best interests of all shareholders. The question also arises as to whether these payments incentivize risky behavior by the very body that is responsible for ensuring that executive compensation does not do so.

So, in view of such an arrangement, how do we help ensure the healthy functioning of boards without compromising the role of shareholders?

We believe one way is to require transparency around these special compensation arrangements. Full disclosure would shed light on the conflicts of interest generated by these arrangements, steer the focus away from short-term results and benefit investors by providing information useful for their investment and voting decisions.

这就是为什么今年早些时候，纳斯达克提出了一项关于证券交易委员会的提案calls for Nasdaq-listed companies to disclose“任何董事或被提名人和任何人或实体之间的所有协议和安排......提供与该人作为董事的候选资格或服务有关的赔偿或其他付款。”在需要披露的情况下，公共公司需要识别协议或安排的各方和物质条款。这项提议易于制定，实用性，符合股东和公司的最佳利益。

活动家投资者自己被编织成企业动力学的织物，具有混合的结果。他们确实有积极和重要的作用。董事会和管理必须受股东挑战，因此他们可以继续开发更好的公司。当他写道，经理的工作是“将他的鼻子抬到山上时，德鲁克认识到这种动态。”

One way to strengthen the healthy symbiosis of checks and balances between corporate leadership and shareholders is to disclose third-party payments to board members. This openness would have a mutually beneficial long-term focus. If these hidden conflicts of interest are brought into the light, we can keep our eyes on the hills and write a chapter in our capitalist story that takes a positive turn.

爱德华骑士is executive vice president and general counsel ofNasdaqin Washington.

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