A meaningless vote
LIFEPOINT HEALTH’S BOARD of directors is plowing ahead with a $120 million golden parachute plan for four top executives ahead of the company’s sale, despite overwhelming opposition from shareholders.
The board itself, which will disband when the deal goes through, is getting more than $11.3 million, not counting the company’s chairman and CEO’s take, as part of the sale.
The payouts are raising eyebrows in the investment community given they total more than the company’s 2017 net income. Analysts, attorneys and others who follow the industry say the unusually high level of backlash the investor-owned hospital company’s golden parachutes proposal received—including rejection from owners of 83% of voting shares and opposition from two leading proxy advisory firms—could come back to haunt LifePoint directors who serve on other boards and should serve as a cautionary tale for other companies establishing such severance packages ahead of acquisition deals.
“It’s a signal to the market that this type of approach is a problem and investors are not happy with it,” said Julian Hamud, director of executive compensation research with proxy advisory firm Glass Lewis. “But as it relates to LifePoint specifically, that’s not necessarily going to do a lot.”
Federal securities law required Brentwood, Tenn.-based LifePoint, which expects to close on its sale to affiliates of the private equity firm Apollo Global Management by year-end, to hold a nonbinding shareholder vote last week on the golden parachutes plan. The results were never going to carry any weight, however: The cash severance and other payout provisions were already in executives’ contracts. The stock awards outlined in the plan will be paid upon the Apollo deal’s closing.
Companies not entering buyouts would face significant pressure to change their pay packages under such conditions, but in this case, it’s just the reputational risk for directors. David Teigman, a partner with Cadwalader, Wickersham & Taft in New York and the head of its executive compensation practice, questioned whether the situation could impact directors’ abilities to serve as directors at other companies.
Several of LifePoint’s directors already serve on other boards, and Glass Lewis’ Hamud said this case raises the question of whether LifePoint shareholders who hold stock in those companies might take their concerns there.
“I think that the question of accountability is a very good one when it relates to these merger situations,” he said. “It also depends on how far investors are willing to track individuals.”
LifePoint director Kermit Crawford, for example, is chief operating officer of Rite Aid Corp. That company’s shareholders last week rejected an executive pay program that some dubbed “pay for failure” because it follows Rite Aid’s failed deal with Albertsons.
The International Brotherhood of Teamsters urged shareholders to vote against the Rite Aid proposal. Michael Pryce-Jones, the Teamsters’ senior governance analyst, said his organization evaluates proposals on a case-by-case basis, but generally will oppose situations where executive pay is going up while shareholder returns dwindle. The Teamsters last year urged shareholders to reject Tenet Healthcare’s compensation plan, arguing then-CEO Trevor Fetter had performed poorly in 2016. The Teamsters do not hold LifePoint stock.
LifePoint director and chair of the board’s compensation committee John Maupin Jr., serves as a director of Encompass Health, a post-acute healthcare management company. LifePoint Director Dr. Reed Tuckson, a former UnitedHealth Group executive, serves on the board of the American Telemedicine Association, CTI BioPharma Corp. and the Alliance for Health Reform.
LifePoint’s seven directors, excluding CEO Bill Carpenter, will receive a combined $11.3 million for shares they own once the Apollo deal closes based on
their roughly 173,000 shares of common stock. Carpenter will receive $140 million based on his 2.2 million shares of common LifePoint stock. Directors also owned varying amounts of restricted stock that may translate into cash after the deal is closed.
And that’s on top of the director’s regular salaries. Last year, LifePoint’s directors took home annual pay of between $140,000 and $215,000.
Calls to directors were referred back to LifePoint, which declined to comment on the parachute plan beyond what was in the proxy statement.
Not too late to alter payouts
Despite the golden parachutes provisions already being in executives’ contracts, Hamud said employment matters are largely negotiable between directors and executives, unless they’re structured in a way that doesn’t permit changes. One example was when Valeant Pharmaceuticals’ CEO agreed to forgo a massive stock award after shareholders expressed opposition.
“So yes, it was an entitlement,” he said. “It was ink on page, but that shareholder pressure moved the board to make steps that the CEO ultimately agreed to.”
But Teigman said the opposition is unlikely to change anything at LifePoint. “They’ve already entered into a merger agreement that calls for acceleration of the equity to be cashed out and they also have arrangements with these executives to pay out these amounts if they’re terminated, so I would not expect them to follow this vote,” he said.
To that end, LifePoint spokeswoman Michelle Augusty wrote in an email that compensation under LifePoint’s existing compensation programs, as contemplated by the merger agreement, will be paid in accordance with its terms outlined in a proxy statement. She declined to comment further.
In the future, companies can mitigate the risk of similar events by upping their shareholder engagement and taking a hard look at their compensation packages to predict whether they would run into proxy adviser opposition, Teigman said.
The Dodd-Frank Act of 2010 requires companies to bring executive compensation proposals before their shareholders annually, a process called “say on pay.” Shareholders don’t have an official say over compensation, although at least 25% opposition should prompt companies to retool them, Pryce-Jones said. The same standard applies in theory to severance pay, although companies about to merge or be sold are less likely to respond to shareholder opposition, he said.
After the Teamsters ran a successful bid against McKesson Corp.’s executive pay plan in 2017, the company cut its CEO’s pay by about 10%. The pay package received about 27% support from shareholders.
Both of the two most influential proxy advisory firms, Institutional Shareholder Services and Glass Lewis, urged their clients to vote against LifePoint’s golden parachutes proposal, a level of unified opposition that’s “very rare,” said Jason Plagman, an analyst with Jefferies.
ISS wrote in a report that it opposed the plan because the awards were set at maximum levels without compelling rationale. ISS also opposed the plan’s use of excise tax gross-ups, which it described as “a poor practice.” ISS declined to comment for this article.
Glass Lewis’ main opposition was the high value of the golden parachute packages relative to the total equity premium the Apollo deal would generate. Glass Lewis determined 18% of the share value gained from the sale of the company could be reflected in the value of the parachute payments, Hamud said. With companies of LifePoint’s size, Glass Lewis expects that to be around 10%, he said.
Brian Tanquilut, an analyst with Jefferies, said he doesn’t believe this will change how hospital companies formulate their future compensation packages, most of which include change-in-control provisions like LifePoint’s. He noted LifePoint’s deal with Apollo includes a payout for shareholders: $65 per share in cash.
“It’s an alignment of incentives, in a way,” Tanquilut said.