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Should board members be paid like bounty hunters? That could be the direction the corporate governance is heading. Take Hess Corp., the U.S. oil company with a $25-billion market-capitalization. Elliott Associates has offered its dissident slate of five directors $30,000 for every percentage point Hess shares outperform a peer index over the next three years. And if any board needs a fire lit underneath it, it is Hess's.
Between 2007 and 2012, the board oversaw a total shareholder loss of 46 per cent. Hess, after Elliott started making noise, has initiated a series of face-saving moves: asset divestitures, fewer cronies on its revised director slate, and most recently, the separation of CEO and chairman titles.
What should investors think of this side payment for board members? For one, it could create factions on the board between legacy members and those who are offered up by certain large investors. But at underperforming companies, boards tend to be too chummy with each other and the CEO anyway. These insurgent directors are still deemed officially "independent" by the rules regardless of any incentive payment schemes and they are there precisely to shake up the status quo.
Another misgiving is that these affiliated board members could be motivated to pursue gimmicks that move the stock in the short term at the expense of long-term value. But for any insurgent directors to make it on to a board, it is likely the stock has not been appreciating either in the short or long term and that a fresh approach to value creation is needed. Moreover, the terms Elliott has offered its directors are similar to existing incentives to managers.
All of which leads to the outcome at this week's Hess shareholder meeting. It seems most plausible that shareholders will be indifferent to the ivory-tower debate over corporate governance best practices and be more intent on who can best oversee the turnaround at a laggard.