The heated proxy contest currenly under way at Hess Corp. has ignited a firestorm of professorial proxy fighting in the blogosphere. After an initial post by Usha Rodrigues, Stephen Bainbridge entered the fray and followed up with an additional post, in addition to blog volleys from John Coffee, Lawrence Cunningham, more from Lawrence Cunningham, and more from Usha Rodrigues, in addition to many others.These blog posts add to the voluminous comments of academics quoted in the proxy materials themselves. The swirling controversy is all summed up in a recent piece by Steven Davidoff'.
Why has this particular campaign stimulated so much professorial proxy pugilism? As background, Elliott Management launched a campaign to elect five directors to the Hess board. As part of the campaign, Elliott agreed to a plan (now abandoned) to compensate those director nominees based on the stock price appreciation of Hess. The plan would pay the new directors $30,000 for each 1% the Hess stock price outperformed a peer group portfolio over a three-year period. Hess took the position that this compensation agreement was designed to serve "short term goals" and would "misalign board interests." Elliott, on the other hand argued that the bonuses were designed to provide incentives for good corporate performance.
The reason the bonus arrangement was so controversial is that it tapped into one (or more) of the longest-simmering debates under the surface of corporate law. That debate is whether there is a such thing as "long-term" shareholder value that differs from "short-term" shareholder value. Hess and its allies argued that the bonus arrangements would give Elliott's nominees incentives to favor "short term" stock appreciation over "long term" value. The implicit assumption is that there is, in fact, such a thing as "long term value" that differs systematically (and predictably) from "short term" stock prices. A second assumption is that three years is "short term." Really, the fundamental question is whether incumbent managers' performance is more accurately priced by the managers themselves or by the market.
The long-term/short-term debate is so controversial because of incumbent managers' extreme aversion to the idea of accountability to the financial markets. When markets do not reward managers' actions with increased stock price, managers retreat to the argument that there is special, "long-term" value that they are creating but that markets don't perceive because markets are focused on the short term. Whether this is a dishonest tactic or merely a honest response to the cognitive dissonance of a negative market reaction, managers have succeeded in averting attention from the market's assessment of their performance.
The Elliott/Hess battle is shaping up as the opening skirmish in the coming war over the issue of "short-termism" in corporate governance. The Hess contest went nuclear because it has broken the academic truce that had reigned since end of the takeover battles of the 1980s. As part of the truce, commentators have largely played along with incumbent managers' arguments, accepting the fiction of what Kraakman and Black called "hidden value" to avoid confronting the role of market discipline in corporate governance. The increasing clout of institutional investors and other changes in the governance landscape, however, have reinvigorated the idea that long term/short term distinction is a subterfuge deployed by managers to further their own self interest and avoid accountability.
In many ways, the Hess battle merely reflects the cracks in the monolith of "hidden value" thinking that has dominated the Delaware courts for decades. In recent months, Lucian Bebchuk and Mark Roe have written important papers on the topic of short-term and long-term value. I myself am working on a draft that I hope will bring some modest contribution to this issue. The long-term/short-term value issue is in some ways the most important one in corporate governance today, and the increasing influence of institutional investors will mean that courts cannot hide from this issue forever.
I will not comment on the specific merits of the Hess nominees versus the Elliott nominees, in part because I fear the arbitrary application of Rule 14a-9 more than other commentators. But stay tuned for more after the results of the proxy contest on Thursday!
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