Proxy Season ’15: Pay and Performance Remain Key Issues

Makovsky

Coming as no surprise, executive pay and corporate performance remain key issues for investors this proxy season. In addition, there has been an upswing in shareholder resolutions related to social and environmental issues.

Let’s take a closer look at some key examples:

Say-on-Pay. Say-on-pay, the nonbinding shareholder votes mandated by Dodd-Frank, has made executive compensation a perennial issue for corporations. Excessive executive compensation has drawn the ire of professional and individual investors alike and they have been making their voices heard through a variety of public channels.

Soft drink giant The Coca-Cola Company has found itself under attack by Wintergreen Advisers, a global money management firm that has publicly leveled a number of accusations against the company. David J. Winters, CEO of Wintergreen Advisers, said: “While there has been progress in some areas at Coca-Cola, the board continues to give Muhtar Kent and his team excessive rewards, and we question whether many Coca-Cola directors are able to vigorously act for all shareholders given their overlapping business interests. Meanwhile, Coca-Cola lags behind while other consumer brands like Heinz and Kraft pursue bold restructurings. Coca-Cola’s board and management lack a sense of urgency to address Coca-Cola’s problems and increase shareholder value… Why does this management continue to receive excessive compensation while missing the performance targets set by the board?”

Performance. Of course, corporate performance matters and activist shareholders have been emboldened over the recent past to take on larger targets.

DuPont, the chemicals giant, has found itself in the crosshairs of Nelson Peltz’ Trian hedge fund in a highly public proxy battle. According to Trian, DuPont is an inefficient company characterized by:

1. Excessive corporate costs , which Trian estimates are $2-$4bn, including ~$907m of publicly disclosed unallocated corporate costs
2. Disparate businesses and overwhelming complexity , which, in our view, have rendered the management team incapable of meeting its own guidance
3. Bureaucracy and a lack of accountability that have led to below-peer organic revenue growth and margins in most segments
4. Poor capital allocation , which we would suggest hurts ROIC and limits TSR over time
5. Poor corporate governance that, in our view, has led to above-target compensation for poor results, continued earnings misses and an obfuscation of performance

At a recent investor event, Ed Garden, CIO and a founding partner of Trian, said, “The reason the company can’t hit its numbers is because of a very bloated, expensive, bureaucratic holding company that is choking the underlying businesses.”

Trian is urging shareholders to vote for its slate of directors at DuPont’s upcoming annual meeting, claiming that they “…will seek to ensure decisions are made by a reinvigorated Board that fosters a transparent, confident and high-performing culture, and proactively addresses operating and strategic opportunities and the challenges to DuPont’s business.”

Social and Environmental Issues. Proxy Preview, a compendium of shareholder resolutions, notes that the 2015 shareholder resolution season is set to break yet another record in terms of the number of resolutions filed on social and environmental issues.

According to the report, 433 social and environmental resolutions had been filed; 417 were filed at this time in 2014. The highest number of resolutions were filed on environmental issues including climate change; corporate political activity; human and labor rights; and on a range of sustainability issues.

“This year we have once again broken the record on the number of resolutions filed, and this year’s proponents have escalated the connection of critical issues to the boards of directors by demanding that shareholders be enabled to nominate board candidates and continue to link executive pay with sustainability,”said Andrew Behar, CEO of As You Sow, publisher of Proxy Preview since 2005.

-Scott Tangney