What Is a Golden Leash?
A "golden leash" is a way to keep new board members interests' aligned with that of the company through special incentives offered by a primary shareholder. The design of a golden leash is to provide the nominee with the necessary influence to act in the interests of the major shareholder. Most often, this is an activist hedge fund, or other institution, which is seeking to introduce a significant change in the target company's strategic direction.
- A golden leash is an incentive package offered to new board members to influence their interests to align with a company's shareholder.
- The incentive is often directly granted by a major or activist shareholder, such as a hedge fund or other institutional investor.
- Corporate governance watchdogs disparage this practice, arguing that it is biased and does not serve the best interests of all shareholders.
Understanding the Golden Leash
Proponents of sound corporate governance often criticize golden leash agreements. These critics feel that special incentives offered to directors may compromise their independence and lead them to favor their backer's agenda, rather than serve in the best interests of all shareholders.
On July 1, 2016, the Securities and Exchange Commission (SEC) approved a Nasdaq rule that relates to golden leash situations. This rule requires U.S. companies listed on Nasdaq to publicly disclose any arrangements in which a third party provides compensation to a company's board of directors during their service in that role. The rule helps prevent situations which could create conflicts of interests or the appearance of conflicts. Also, it helps avoid questions or doubts about a company leader's interests and priorities. In approving this rule, the SEC noted that the new policy essentially reinforces regulations already existing which relate to domestic issuers in the U.S., so the new Nasdaq rule would mostly be relevant in the case of foreign private issuers or other limited situations.
Shareholder activism is a way that shareholders can influence a corporation's behavior by exercising their rights as partial owners.
Example of a Golden Leash Arrangement
The term golden leash became a part of popular financial parlance following the bitter proxy fight between Canadian fertilizer giant Agrium and its largest shareholder, the activist hedge fund, Jana Partners.
In the summer of 2012, Jana proposed that Agrium spin off its retail business to boost shareholder returns. However, Agrium steadfastly rejected Jana's proposal. The thought was that splitting up its retail and wholesale businesses would jeopardize its finances and erode shareholder value. Jana responded by proposing a new slate of directors to serve on Agrium's board. Controversy followed this announcement. Jana revealed that its four nominee directors would receive a percentage of the profits earned by Jana Partners shareholdings of Agrium, within a three-year period commencing Sept. 2012. Agrium deemed this as a golden leash arrangement, unheard of in Canada at that time, and said it created an apparent conflict of interest that refuted the independence of Jana's nominee directors.