Tag Archives: Proxy Voting

The Annual Meeting is Dead. Long Live the Annual Meeting!

Posted by on September 9, 2010 No comments

The Rise of the Virtual Investor

A few days ago, I wrote about the brouhaha that has erupted over Symantec Corporation’s plan to hold an online-only shareholder meeting on September 20th. The U.S. Proxy Exchange and CorpGov.net have taken exception to Symantec’s plan to hold it’s meeting only on the Internet, suggesting that this effort is an affront to important shareholder rights.

As was noted in its post on the subject, CorpGov.net’s James McRitchie wrote, “[s]ome investors have expressed concerns that virtual-only meetings would deprive them of the opportunity to meet with company representatives face to face. They believe that physical meetings allow investors to better express their positions – and that management and the board listen more closely when communications are made in person.’

If the primary purpose of attending a shareholder meeting is to confront company executives face-to-face and to engage in a bit of verbal jousting, then by all means, fight the good fight and get executives to see the light and stay with in-person meetings. But is that what investors actually want from an annual meeting?

Let’s review the annual meeting process for a moment.

An annual meeting is convened to consider management and shareholder proposals and allow for both company representatives and shareholders to engage in a presentation of views about matters pertaining to the corporation. To suggest that the parties engage in a discussion is a bit of an overstatement as most executives simply try to get through the process as quickly as possible while shareholders either read their proposals that have already been published in the company proxy statement or raise issues of concern to them. The proxy ballots have already been tabulated and the company representatives already know where things lie. On occasion, the meeting becomes a forum for shareholder theater where the wrongs of the company are put on full display. An hour or so later, everybody goes home.

The virtual shareholder meeting is a game changer. What it does is remove the human element from this process. Indeed, it enables wily CEOs to avoid one of the few times they have to go mano-a-mano with the company’s owners. More importantly, it forces investors to develop meaningful strategies for expressing their views and influence the annual meeting process.

As I have noted in a number of previous posts on this subject, the annual meeting process has devolved into a form of Kabuki Theater, a drama in which the outcome is already determined before the play begins. Taking this process off the table forces shareholders to engage in creative forms of engagement, which they have largely failed to do.

Let me suggest a couple of shareholder approaches in a virtual world:

  1. Social Networking: Facebook and LinkedIn shareholder pages discussing the issues
  2. Investor Blog: An in-depth discussion of the issues surrounding the annual meeting
  3. Online Commenting: Make noise as a commenter on other blogs, investor forums and other online publications
  4. Microblogging: Twitter like hell. Got a quick thought, Tweet it. Find an article of note, put it up.

None of these tasks are easy and they take time and thought. But herein lies the challenge to investors: Do you simply want to rain on the CEO’s parade or do you want to improve the company’s performance and shareholder value? I argue that the virtual meeting is a wake up call for investors to develop substantive strategies for effecting corporate change.

Performance-Based Proxy Voting

Posted by on March 11, 2010 2 comments

As I often do when speaking before groups of people about proxy voting and corporate governance, I asked this question: “What do you do with your proxies?” The answer, which you can probably predict from your own experience is, “I throw them away.”

The follow on question I pose evokes a bit more complex response but a common thread usually emerges. “Why do you throw them away?” Almost to a person the reason is that people simply don’t understand how to vote on the issues. Fearing that they might do something stupid, most people opt for the trashcan.

To solve this information problem, I propose to offer a series of proxy voting strategies that are simple in form, don’t require much time to figure out and get the job of voting your proxy done with relatively little pain.

Here is my first strategy.

Slide1

Now that’s not too complicated is it?

I realize that some readers might find this approach too simplistic. But given that most people don’t take the time to vote, I hope this approach will provide a means for investors to become more engaged in the governance process.

Let the debate begin . . .

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.

ishot-6

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.

7 Things to Look For in a Proxy Statement

Posted by on March 4, 2010 No comments

proxydrawingI was nosing around on footnoted.org today, gathering ideas about companies to target for our Vote Recommendations. As I drilled down into the site, I came upon a page written by Michele Leder, footnoted.org’s founder about what to look for when reading SEC filings. Her recommendations for scanning a proxy statement were interesting and it prompted me to think about what I look for when grinding through a proxy statement.

  1. How many times did the audit committee meet in the past year? Does the audit committee seem to have enough experience and independence to ask tough questions of company management?
  2. What types of related party transactions are being disclosed? Has there been a substantial increase in these transactions? Do they seem reasonable?
  3. How much stock do executive officers own? What about the directors?
  4. Do executive salaries correspond in any way to the company’s financial performance over the past year?
  5. Do the retirement benefits for executives (including pension benefits) seem excessive given the company’s performance?
  6. How much is the company paying its accounting firm for non-audit services? How does this compare to previous years?
  7. What sorts of shareholder proposals are being included in the proxy? Do they raise concerns about the company’s approach to corporate governance?

Some of these questions seem broad in scope when thinking about how to vote your proxy. But they are certainly a good guide for tackling the task. One way to think about analyzing a proxy statement is to ask yourself what you are trying to accomplish when reading the document. For instance, the first 2 questions above focus on director qualifications. Did the board and its key committees meet a sufficient number of times to do their jobs? Similarly, do any of the directors have any potential conflicts that might affect their judgment as directors?

Questions 3, 4 and 5 relate to executive compensation questions that can give a voter some clarity about how to vote for compensation-related issues coming to a shareholder vote.

Question 6 addresses the core concern about outside auditors. Are other fees excessive, suggesting possible conflicts of interest for the auditors?

Finally, Question 7 makes an interesting point about shareholder proposals related to corporate governance matters. It’s the old “where there’s smoke there’s fire” notion that if an institutional investor is raising a corporate governance issue by going to the trouble of submitting a proposal, there may be some concern related to that very issue that you as a shareholder should pay attention to.

The staff at footnoted.org have figured out a way to have fun with what could be a painful exercise. Obviously having a purpose when reading a proxy statement is key to your success. Give it a try?