Tag Archives: compensation committee

KB Homes: Where is the Compensation Committee?

Posted by on March 10, 2010 No comments

As noted on Wednesday, ProxyAnalyst recommends a vote against the Compensation Committee members of the board of directors at KB Homes. The Los Angeles-based homebuilder has continued to grant substantial stock awards, retirement benefits and bonuses to its CEO Jeffrey Mezger while the company has underperformed over the last five years.

In 2009, Mr. Mezger was awarded a base salary of $1M. However, after awards of stock options, stock grants, incentive awards and a slew of other compensation benefits, his salary rose to more than $9M.  While his total pay has fluctuated over the last five years, it has in no way tracked the overall performance of the company for that period.

The following graph reflects the company’s stock price performance for the period. It is not a pretty sight with the company losing almost 70% of its share value during that period.

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What I find most troubling is the manner in which the Compensation Committee failed to adequately address shareholder concerns while shoveling executive pay out the door. The compensation problem at KB Homes hasn’t gone unnoticed by at least some shareholders.

Last year, the company was targeted with a proposal calling for an advisory vote on future compensation packages doled out by the board. The proposal received a majority of the motes cast on the issue. However, the company rejected implementing the proposal saying:

Although a majority of votes cast were in favor, the proposal failed to achieve the affirmative vote of the majority of shares of our common stock present and represented at the 2009 annual stockholders meeting, the applicable standard under our by-laws. Based on this outcome and given the significant legislative and regulatory momentum underway at the time of the 2009 meeting and through to the present time to establish a mandatory advisory vote for all U.S. public companies, your Board continues to believe that it is in the best interests of all stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established.

So what the company said here is interesting for two reasons.

First, it points out a glaring flaw in the proxy voting system in which a company – in this case KB Homes – can count votes present or broker non-votes in calculating the total votes counted.

Let’s put this in the context of a presidential election. You and I vote for our candidate (he is running against the incumbent). Our guy receives a narrow majority (say 35 million) of the votes cast in the election out of a total of 60 million votes cast. However100 million voters were eligible to cast their votes. But 40 million of them stayed home. The incumbent says, “100 million voters are eligible to vote and if they didn’t, we will assume they voted for us, the incumbents.” So the incumbent counts an additional 40 million votes in his favor and walks away with the election.

Doesn’t sound fair but that is what KB Homes executives did in 2009 on the say-on-pay shareholder proposal.

Second, the company argues that because legislation is pending in Washington that might be a game changer on executive pay practices, it somehow shouldn’t have to pay attention to the wishes of a majority of its voting shareholders. What was that legislation anyway? While Congress has been debating financial reform for some time, nothing has materialized and the SEC has not taken any grand steps to obligate companies to obtain shareholder approval of pay awards. There is no real risk of legislative reform and I suspect that company executives knew that but obfuscation rather than reality seems to be the order of the day in that statement.

That brings us back to the situation at hand. The four directors, Stephen F. Bollenbach, Timothy W. Finchem, Michael G. McCaffery and Luis G. Nogales have not served the best interests of KB Homes shareholders in granting these pay packages to the company’s executives. Mr. Nogales is over-boarded (he serves on three other boards), Mr. Bollenbach is overpaid to the point that his independence is called into question and the Committee as a whole has not publicly demonstrated any sort of public leadership that could clarify its decision to pay executives outsized pay packages at shareholder expense.

12 Factors to Consider When Voting on a Board of Directors

Posted by on March 8, 2010 No comments

12-factorsOkay, given that most director elections are uncontested, you might think that giving any consideration about how you vote for a director is meaningless.

Wrong.

In fact, there are a number of examples where shareholders have sent a message to directors that have brought about profound changes in the corporation. The most immediate example I can point to is the substantial number of votes cast against Bank of America’s CEO and Chairman Ken Lewis in the Spring of 2009. By October, Lewis was gone.

Shareholders can have an impact on the outcome of director elections if they vote their proxies.

While the dramatic events at Bank of America made it obvious to many of the company’s shareholders that Lewis had to go, for investors at other companies, the reasons for voting against a director or directors might not be so obvious. Therefore, I have put together this list of 12 factors to consider when voting for or against a slate of directors at a public company:

Director Qualifications

1. Does a director attend at least 75% of the director meetings?

This is a fundamental question that goes to whether a director is actually doing his or her job. Look at the company proxy statement in the director section for attendance records of individual directors.

2. Does a director sit on too many other boards?

As a general rule, a director who sits on too many boards (3 total) cannot possibly serve the interests of shareholders at your company. If your company is facing a significant challenge, a director should probably not be sitting on any other boards.

3. Does the director have the necessary skills to do his or her job as a director?

While regulations now require directors to have financial experience if they serve on the board’s audit committee, look for other qualifications that a director has or perhaps shouldn’t have when serving on the board. One factor to consider is if there are too many CEOs from other companies serving on the board, particularly on the compensation committee.

4. Does a director have conflicts or other disqualifications that raise questions about his or her ability to serve the interests of shareholders?

While directors are identified as being independent or insiders and the proxy statement must include possible conflicts that individual board members might have, look for other factors (social, board interlocks) that might suggest that he or she is not qualified to serve on the board.

5. Is the director sufficiently independent of management of the company?

Look to the proxy statement to determine if a director is independent of management. The document spells it out. This doesn’t get at every possible relationship between the director and management but it is the only way to easily sort out all but the most subtle examples of possible conflicts and lack of independence.

Board Independence

6. Is the board as a whole sufficiently independent of management of the company (1/2 to 2/3 of the directors should be independent)?

After analyzing who on the board is independent, add up the numbers: at least 2/3 of the board should be independent of management. This helps to ensure that the interests of shareholders, not management, are being served.

7. Are key committees (Audit, Compensation and Nominating) of the board completely independent of management of the company?

This is a hard and fast rule. There should be no insiders on any key committee of the board. NEVER. These specific committees are delegated with important responsibilities to protect shareholders. Having management directors sitting on these committees is like handing the keys to the hen house over to the foxes.

Board and Company Performance

8. Have key committees of the board adequately performed their duties?

Look to see if the company has experienced any problems associated with the committee in question. Examples abound here. Has the company experienced financial troubles? Is executive compensation out of control? Is the average tenure on the board seemingly long? This is about committee performance and it goes to the core of what directors are or aren’t doing on behalf of shareholders.

9. Has the company performed well over the long-term?

Look at long-term performance of the company and consider whether the company has underperformed relative to its peers and relevant benchmarks. Do not get caught in the trap of using short-term measures, either good or bad ones. In today’s markets, one-year performance can be dramatic for a company but it could still be in the tank from a long-term perspective.

10. Overall, has the company conducted itself properly?

Consider if the company has been involved in scandals or crises over the previous year and also factor in how the company handled itself in the process. Does it appear that the board is “asleep at the wheel?” Perhaps it’s time for them to go.

11. Has the board been responsive to shareholders including implementing previously approved shareholder proposals?

Does the board have a demonstrated record of being responsive to shareholder concerns? Consider if the board has procedures in place for addressing shareholder concerns. Most important is whether the board has implemented shareholder proposals that have garnered majority support in previous years.

12. Has the company adequately addressed the views of other stakeholders?

Look to whether the company has addressed issues of concern to its stakeholders – customers, suppliers, communities in which it operates and so on. Recent examples include Toyota (recall), Comcast (customer service) and the myriad companies off-shoring jobs.

Remember, if you do nothing, that is you don’t vote your proxies, then the directors of your companies get reelected. Therefore, it is your job to look for reasons to vote against the directors standing for election or reelection. For more information about how to vote for directors, visit our Proxy Voting Strategies pages at the ProxyAnalyst.com.