A mean­ing­less vote

Modern Healthcare - - News - By Tara Ban­now

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.