How Corporate Governance Is Made: The Case of the Golden Leash

This Article presents a case study of a corporate governance innovation—the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them. The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries—activist investors, institutional advisors, and corporate law firms. The golden leash also presents an opportunity to test the response of share prices to governance innovation. We conduct two cross-sectional event studies around key dates that affected the availability of the golden leash. Our core finding is that share prices of those firms facing activist intervention reacted positively to events that make golden leashes more available and negatively to events that make golden leashes less available. Moreover, we find that this governance innovation did not affect every firm in the same way. Only the share prices of those firms most likely to be subject to activist attention experienced statistically significant share price reactions. Our research contributes to the debate over how corporate governance is made and its economic significance. Although we find that corporate governance provisions may be priced, at least in some circumstances, our study also suggests that corporate governance is a complex story involving the actions and reactions not merely of the firm and its shareholders but a variety of intermediaries and interest groups that have agendas of their own