Energy boards and management have paid close attention to activist shareholders this proxy season, including current proxy battles and investor activism at Hess Corporation (Elliott Associates), SandRidge Energy (TPG-Axon Capital) and Nabors (Pamplona Capital). Each has included a discussion of corporate governance and compensation. This Meridian update doesn’t take a side in these discussions; instead we find it helpful to monitor these events for what other energy companies might learn.
A review of each company’s shareholder activism reinforces some basic fundamentals in corporate governance and executive compensation:
- Be Prepared
- Any company’s stock price performance may lag for extended periods. Trends change and transitions can take time. A healthy defense starts with understanding that today’s good performance may not fend off tomorrow’s criticism.
- Also note that investors have never had such ready access to a high volume of performance and pay information in an easy digital format. Third parties can easily build a detailed business case, sometimes with differing conclusions from the company’s own disclosures.
- Maintain strict governance processes
- Process is important – stay current on changing governance standards and review board charters, calendars, and meeting agendas carefully to establish tight compliance.
- Avoid even the appearance of conflicted interests. Within a close-knit industry it can be difficult to establish “perfect” independence, but boards should recognize that perceived conflicts are difficult to explain away after activists engage.
- Tie outsized pay to outsized performance
- Activism elevates concern about standing out in periods of relatively poor performance. Companies should demonstrate a consistent and clear connection between pay and performance. Short-term bonuses should align with short-term performance (good or bad), even if current year results lag because of well-regarded long-term investments or transitions.
- Exceptional compensation should have a direct tie to exceptional stock price performance. Boards should avoid delivering above-normal compensation based solely on subjective or discretionary factors.
- Director pay can also offer an easy target for activists. Companies should keep director compensation within a reasonable fairway of industry peers.
- Generate strong shareholder voting results
- Monitor proxy advisor reports even when the recommendation is positive and consider reasonable responses that might improve governance ratings. A history of consistently strong shareholder support (90+% Say on Pay approval) is tough to argue against.
Disciplined governance provides a healthy defense from third-party activists. Boards shouldn’t shy away from being different or unique, but a disciplined process and consistent standards help keep companies on firm ground.