Hess: Through a Glass Darkly

Independent firm endorses Elliott's nominees; company fears "Balkanizing the board"

NEW YORK -- As the May 16, 2013, annual shareholders meeting nears, the conflict between Hess Corp. and major investor Elliott Management Corp. to choose its board of directors--and to determine the direction and fate of the company--continued this week.

Elliott, one of the largest shareholders of Hess, said that independent proxy voting advisory firm Glass Lewis & Co. has recommended that Hess shareholders vote to support all of Elliott's independent nominees: Rodney Chase, Harvey Golub, Karl Kurz, David McManus and Mark Smith.

Glass Lewis acknowledged the lack of oversight and accountability at the board level at Hess in its report, Elliott said. Its analysis included a review of both sides' positions including consideration of the company's total shareholder return, operating performance and financial performance, as well as the strong experience and qualifications of Elliott's nominees.

"We believe Elliott has submitted a compelling case to suggest the Hess board has been largely ineffective at overseeing current management, including by failing to thoroughly vet strategies that have left the shareholders exposed to a range of high-risk exploration programs and noncore businesses. These strategies, which have been masked in no small part by the near-constant restructuring programs forwarded by management, appear to have resulted in substantial damage to shareholder value over most any meaningful time frame and against any applicable peer group," said Glass Lewis.

"Further, we find the board's response to Elliott has been flat-footed and reactive, as exemplified by the expeditious announcement of a vastly increased dividend, a large share buyback program, unprecedented board turnover and the hasty disposal of heretofore strategically beneficial assets. Viewed together with what we believe is a token proposal to declassify the board, a change shareholders have overwhelmingly supported three times since 2008, we find this framework more reflective of an effort to mollify a rankled shareholder base and maintain the status quo than any indication of meaningful change at Hess."

John Pike, senior portfolio manager at Elliott, said, "The Glass Lewis report underscores the longstanding problems at Hess and the reasons why change is desperately needed in the boardroom. It highlights the pattern of endless restructurings and an ongoing lack of accountability that has led to subpar returns for shareholders over any measure of time. Hess shareholders deserve more than a board that is just paying lip service to change. They deserve highly qualified and truly independent shareholder nominees with deep E&P [exploration and production] experience who can ask the right questions, bring accountability to the board and help unlock the substantial value that we believe exists at Hess."

Glass Lewis added, "Turning toward the remainder of the strategic transformation championed by the current board, we believe the dissident concisely and effectively illustrates a troubling and long-standing pattern of near-perpetual restructuring programs headed by John Hess throughout his tenure. Indeed, concurrent with the laggard shareholder returns noted above, it appears Mr. Hess has publicly forwarded a complex and, at times, conflicting array of rebuilding alternatives, none of which appear to have received strong endorsement by investors in the form of increased trading prices.

"To the contrary, we expect the company's share price has been negatively impacted by the uncertainty associated with management's ever-shifting strategic agenda, and, with reference thereto, doubt board oversight of the current program is likely to result in a significantly different outcome than has been routinely delivered since the start of Mr. Hess' service as CEO. Put simply, while we accept the shift toward a pure-play E&P structure may represent the most attractive alternative available to Hess, we find little cause to suggest the current board is best suited to oversee that change."

New York City-based Hess commented on the Glass Lewis report. "Hess disagrees with Glass Lewis' recommendation and believes that shareholders who follow its recommendation at a time when Hess is executing on a market-endorsed transformation plan will put the value of their investment at risk."

It added, "Without meeting or even talking to Hess, Glass Lewis arbitrarily brushed aside the facts and blindly accepted Elliott's distortions. We are executing well against our multi-year transformation to a pure-play E&P company, a plan that has received overwhelming support from our shareholders and independent Wall Street analysts, a fact flatly ignored by Glass Lewis. Our five new director nominees are committed to creating sustainable long term value for all Hess shareholders, and are the clear choice for those who want truly independent, experienced new directors who will represent their interests. The market has affirmed the economic superiority of our transformation plan and we believe that our world-class slate of new, independent nominees is best suited to objectively oversee the execution of that plan."

The proxy advisory firm recommendation "inexplicably discounts the value creation potential of our transformation plan and the world-class asset base that the Hess board has assembled. ... Glass Lewis instead reflexively supports dissident directors who are neither independent nor incentivized to act in the best long-term interests of all Hess shareholders. At a time that we are delivering real value, blindly following Glass Lewis' recommendations would introduce a dissonant element to the Hess boardroom and create significant risk. ... Electing the Elliott nominees would jeopardize the ongoing success of our transformation plan by creating a strategically misaligned board which includes dissident nominees who are directly compensated to pursue Elliott's short-term agenda."

Hess noted that Glass Lewis made its recommendation despite raising serious concerns over the propriety of the Elliott nominees' unusual contingent bonus scheme that incentivizes them to pursue Elliott's short-term goals.

Hess concluded, "Glass Lewis undermines the integrity of its own recommendation, arguing that the Elliott nominees have already compromised their independence by agreeing to an unusual contingent bonus scheme that incentivizes them to pursue Elliott's short-term goals. Leading corporate governance experts have called this kind of scheme 'the dark side' of activism. It is troubling that Glass Lewis would recommend that Hess shareholders risk 'Balkanizing the board' by voting for a dissident slate that the proxy advisor admits is conflicted. We would caution our shareholders against disrupting our progress by voting for conflicted dissident directors whose decisions are motivated by the direct and substantial compensation they would receive from a single shareholder."

For more details on Elliott's viewpoint, visit its Reassess Hess website. For more details on Hess's viewpoint, visit its Transforming Hess website.