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Golden Leash

Golden Leash
BusinessBusiness LeadersCeos

What Is a Golden Leash?

A "golden leash" is a method for keeping a board member's interests lined up with that of the company through special incentives offered by a primary shareholder. The design of a golden leash is to give the board member the essential incentives to act in the interests of the major shareholder. Most frequently, this is a activist hedge fund, or other institution, which is seeking to present a huge change in the target company's strategic course. The golden leash furnishes the board member with a monetary gain on the off chance that they act out the interests of the shareholder.

Figuring out a Golden Leash

   Shareholder activism is a way that shareholders can influence a partnership's behavior by practicing their rights as partial owners. Defenders of sound corporate governance frequently scrutinize golden leash agreements in these circumstances. These pundits feel that special incentives offered to directors might compromise their independence and lead them to lean toward their supporter's plan, as opposed to serve to the greatest advantage of all [shareholders](/shareholder).

In any case, others claim that a major shareholder will as a rule maintain that a company should succeed, especially activist investors who accept that they can work on a company, particularly weak ones, and transform them into beneficial businesses. A strategy like this would then benefit all shareholders. In this case, a golden leash is viewed as a method for controlling a board member to guarantee they enact the confided in vision of the bigger shareholder.

Regulatory Oversight

On July 1, 2016, the Securities and Exchange Commission (SEC) approved a Nasdaq rule that connects with golden leash circumstances. This rule requires U.S. companies listed on Nasdaq to publicly uncover any arrangements wherein an outsider gives compensation to a company's board of directors during their service in that job.

The rule forestalls circumstances that could make conflicts of interest or the presence of conflicts. Likewise, it evades questions or questions about a company leader's interests and needs. In endorsing this rule, the SEC noticed that the new policy basically builds up regulations previously existing that connect with domestic issuers in the U.S., so the Nasdaq rule is most pertinent on account of foreign private issuers or other restricted circumstances.

Reactions of a Golden Leash

Those people that accept a golden leash is beneficial, contend that it carries gifted people to the company through the commitment of monetary compensation. A skilled director on the board of a company will lead it in the right bearing, particularly in the event that their monetary incentives are lined up with the company. Regardless of this fact, there stay numerous pundits of golden leashes.

One of the principal concerns is that zeroing in on short-term price increments, expanding the current value of the firm, can hurt the firm in the long term and its stability. This, of course, is an admirable statement, notwithstanding, can be cured by organizing a golden leash to a long-term time horizon.

Pundits likewise contend that a significant part of the monetary compensation is paid by an outsider as opposed to the firm on which the board member sits. This, pundits contend, strips away the independence of board directors, as well as their authority, in the event that they are obliged to an outside party. This too can be helped by organizing compensation to come from inside the firm.

True Example

The term golden leash turned into a part of well known financial speech following the harsh proxy fight between Canadian compost monster Agrium and its biggest shareholder, the activist hedge fund, Jana Partners.

In the late spring of 2012, Jana recommended that Agrium [spin off](/side project) its retail business to support shareholder returns. Notwithstanding, Agrium unflinchingly dismissed Jana's proposal. The idea was that separating its retail and wholesale businesses would endanger its finances and disintegrate shareholder value.

Jana answered by proposing another record of directors to serve on Agrium's board. Discussion followed this announcement. Jana revealed that its four nominee directors would receive a percentage of the profits procured by Jana Partners shareholdings of Agrium, inside a three-year period beginning September 2012.

Agrium considered this as a golden leash arrangement, unfathomable in Canada around then, and said it made an apparent conflict of interest that discredited the independence of Jana's nominee directors.

Features

  • A golden leash is an incentive package offered to a board member to influence their choices to line up with a company's shareholders.
  • Corporate governance guard dogs stigmatize this practice, contending that it is biased and doesn't serve the best interests, all things considered.
  • The incentive is in many cases straightforwardly conceded by a major or activist shareholder, for example, a hedge fund or other institutional investor.