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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Oil Companies Ignoring Investors

Oil Rig

One unexpected casualty of the oil price downturn is the self-respect of some energy investors. Equity investors are the owners of publicly traded companies and companies’ sole purpose is to act in the best long-term interests of their owners – at least in theory. That dynamic seems to have broken down at one major OFS firm though.

Take Nabors Industries for example. Investors at the company are concerned about a host of issues from board composition and shareholder communication to the firm paying its executives too much at the expense of shareholders. In a sign of that dissatisfaction, investors voted to oust 3 of the directors from the board in the June 7th election. Those directors tendered their resignations, but all three will be keeping their jobs.

Lead director of Nabors, John Yearwood failed to get a majority of shareholder votes at the last four annual meetings – a remarkable feat given that board elections are usually more of a formality than anything. The responsibility to accept Yearwood’s resignation lies with Nabor’s governance and nominating committee. That committee is headed by Yearwood. The other two members of the committee are Michael Lin and Howard Wolf, both of whom were voted out in this year’s election. Nabor’s decided that it would not be fair to have the three directors decide their own fate, so the company appointed a special committee of independent directors to decide what to do. The newly appointed independent committee decided that Lin, Yearwood, and Wolf should all keep their posts regardless of the shareholder vote. This marks the fourth year in a row that a similar situation has played out at Nabors. Nabor’s bylaws give the company the right to ignore shareholder votes because under the bylaws such votes are considered advisory.

Nabor’s is not the only company to take this approach. Of the 2,000 companies on the Russell 3000 index, only 43 directors failed to win majority votes in shareholder elections last year. Yet of those 43 who were voted out, 38 ended up sticking around anyway according to Bloomberg. Related: What Will You Do When The Lights Go Out? The Inevitable Failure Of The US Grid

Nabors is not the only company in a dispute with some of its shareholders, but it may be the firm with the most acrimonious dispute. In six votes held recently on executive compensation, Nabor’s shareholders have voted down executive compensation plans five of the six times with little effect. Only one of the last six plans has been approved by shareholders – the 2015 pay package which cut compensation for Anthony Petrello, Nabor’s CEO, versus previous levels. In the June 7th vote this year, Nabor’s shareholders voted against the CEO’s pay package. Petrello’s pay package this year almost doubled to $27.7 million from $14.8M last year thanks in part to a merger related bonus.

Given the circumstances at Nabor’s it’s unclear if shareholders have any power to directly impact significant change. In most circumstances, the board is supposed to act as advocates of shareholders, but that approach has run into some roadblocks at the company. Nabor’s stock market value today stands at roughly a third of what it was a few years ago, likely due to a combination of investor dissatisfaction and of course the sharp plunge in crude prices. Given that, disaffected shareholders should be hoping for the alternative mechanism to enforce proper corporate governance – a takeover of the company.

By Michael McDonald of Oilprice.com

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