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File photo of Agrium chairman Victor Zaleschuk (left).Denis Cahill/The Canadian Press

Fertilizer maker Agrium Inc. is raising concerns about an unusual compensation program proposed by U.S. hedge fund Jana Partners for four independent directors it has nominated to join the Agrium board, saying the incentives would tie the directors to Jana by a "golden leash."

Jana has offered to pay its four director nominees a percentage of any profit the hedge fund earns within a three-year period on its Agrium shares, retroactive to Sept. 27, 2012. The payments would be on top of normal compensation the directors would also earn from Agrium for their board service.

Agrium chairman Victor Zaleschuk said the payments erode the independence of the directors by financially tying them to Jana, and create an incentive for the directors to make decisions with an eye on a short time-frame. "This kind of 'golden leash' arrangement is unheard of in Canada and raises serious questions about the independence of Jana's nominees and their ability to act in the best interests of all shareholders," Mr. Zaleschuk said in a letter to Agrium shareholders released Monday.

Jana and Agrium have been locked in a prolonged battle since Jana approached the fertilizer company last spring to urge it to spin off its retail business, which sells products such as fertilizer and seeds to farmers, to unlock value from the assets.

Jana proposed a new partial slate of directors in a November proxy circular, which would include Jana managing partner Barry Rosenstein as well as four other independent directors, who would replace five of Agrium's 13 existing directors.

Jana partner Charles Penner said the compensation plan was designed to align the new directors' interests with the share price. He said none of Agrium's other shareholders have complained about the proposal since it was revealed in a proxy circular in November. "The truth is that these arrangements are not discretionary but are based solely on Agrium's performance for all shareholders, and there's no such thing as being 'too aligned' with shareholders," Mr. Penner said.

He said it does not impact the independence of directors when they are aligned with shareholders if they have no conflicting financial relationship with the company itself.

"It's true that this expense is borne by us, but it benefits all shareholders like all of our other expenses here and that is the nature of shareholder activism," he said.

Agrium outlined its concerns Monday in conjunction with the release of its own proxy circular, which urges shareholders to reject Jana's slate and oppose the plan to break up the company.

Matt Fullbrook, manager of the Clarkson Centre for Business Ethics and Board Effectiveness at the U of T said the profit-sharing program turns the nominees into the equivalent of Jana employees because they would receive separate payments from the hedge fund. He added the concentration of Jana-related directors is out of proportion to the fund's 7.5-per-cent ownership stake in Agrium.

"Jana's representatives have a financial incentive to make decisions in Jana's interests, even if they run counter to the interests of other shareholders … This looks like a real conflict of interest," Mr. Fullbrook said.

Stan Magidson, chief executive officer of the Institute of Corporate Directors, said the private compensation arrangement could undermine the requirement for directors to act in the best interests of the entire corporation.

"Given that that's your duty, it's a concern that this kind of incentive arrangement paid by a particular shareholder detracts from that clear line of duty and who you owe your responsibility to," he said.

Board consultant David Anderson of the Anderson Governance Group in Toronto said it is "particularly poor practice" to divide the board by giving directors different pay schemes. "By compensating directors on the same board differentially, this risks conflict as some directors may question the motivation of other directors when debating options before the board," he said. "Further, it may split the board with perceived alliances among some directors and managers."

But Canadian governance advocate Carol Hansell, whose law firm is working for Jana in the takeover deal, said she sympathizes with the need to offer incentives to get good nominees because it can be difficult to get people to "stick their necks out" to sit on a dissident slate in a proxy battle.

She said directors will be paid based on improvement in the share price, and they are not obliged to do anything else for Jana.

Not only would the Jana nominees have additional possible payments than other directors, but they would each be eligible for different amounts of money. Jana's proxy circular shows businessman Stephen Clark would get 0.85 per cent of Jana's profits, for example, while former federal agriculture minister Lyle Vanclief would get 0.25 per cent.

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