Golden Leash
Categories: Company Management
In the world of animal fashion, golden leashes are a hot accessory for purse dogs and pet alpacas. In the world of business, golden leashes are a hot accessory for members of company boards...and we’re going to explain why that’s not nearly as weird as it sounds.
First of all, golden leashes are metaphorical, not literal, so that should ease some minds. They work like this: if a major shareholder of an organization offers an attractive financial incentive to a member of that organization’s board in return for said board member acting in the shareholder’s best interests, that’s a golden leash. The shareholder is basically saying that they’ll give the board member a bunch of money as long as that board member allows the shareholder to guide their behavior, much like we (attempt to) guide a dog’s behavior when we put them on a leash.
Fans of golden leashes say there’s nothing wrong with persuading a company’s board to act in the best interests of its shareholders. After all, that’s kind of what it’s all about, isn’t it? Why would we buy stock in a company if we thought they were going to do terrible things with our investment? Answer: we wouldn’t, so if we’re a major shareholder (like a hedge fund or big investment firm), it behooves us to try and make sure the organization is making good choices with our money.
Golden leash detractors, on the other hand, frown at the thought of one investing party having so much potential sway over a board member. “Seems shady,” they say, “offering big bonuses to folks for trying to force a company to do something it might not otherwise want to do”...like diversify its business model, move its company HQ, or bring in a new CEO, for example. They’re not alone in their doubt; there are rules in place on certain exchanges (like the Nasdaq) that require companies to disclose any golden leash action they’ve got going on. Those rules are all about creating transparency: we might still choose to invest in a company with golden-leashed board members, but at least this way, we know what we’re getting into.