Earlier, we highlighted how investors have begun to pay directors themselves (see below for the blog post). We've seen a couple of interesting developments since then, one very good, another not so much.

First, ISS analyzed the state of the bylaw amendments that seek to limit or prevent investors from doing this. They report that after opposition from shareholders, over half of the companies that amended their bylaws to do this had already rescinded the amendment. (Please note the prescient reference to the Chicago Cubs.)

Second, CII penned a letter to the SEC urging it to require complete disclosure of any such compensation arrangements. It seeks details on cash and equity components, indemnification provisions, and the range of total compensation possible under the arrangement. Importantly, the CII does not seek to limit or prevent investors from doing this, only full disclosure.

We typically like disclosure, say when companies disclose how and how much they pay executives and directors. In this latter case, disclosure helps uncover potential conflicts when companies can influence shareholders' elected representatives.

Yet, as we noted before, this disclosure makes little sense. In particular, if a PM also serves on the BoD of a portfolio company, these potential regulations would require disclosure of compensation arrangements between a PM and his or her employer, which should remain private between the two parties. Even for a director that is not PM, we can't see how disclosure of a private compensation arrangement between a director and an investor would reveal any conflicts that outweigh a director's fiduciary duty of loyalty to all investors.

Now, why would an investor would pay a director to serve on the BoD of a portfolio company? Especially when companies already pay directors? Probably to recruit outstanding candidates to run against incumbents, and align company and director incentives. But, that decision and its rationale remain the prerogative of the investor and the director.

But, whether they can do so, and whether the company can restrict investors from doing this, is quite clear: investors can, and companies that restrict this are wrong. These restrictions not only limit the candidates that investors can recruit to a BoD. They can also limit how portfolio managers can serve on a company BoD, and require disclosure of PM salary and bonuses. Shareholders can and should punish companies and BoDs that seek to restrict these arrangements.