Posted on November 2, 2012 by Ben Connard
We vote proxies for most of our clients. We take the responsibility to vote our proxies seriously and have guidelines we follow.
Most of the guidelines relate to the board composition. We want an independent board, including a separation of the Chairman and CEO roles. We prefer board members that do not sit on too many other boards, and especially not the board of competing companies. We’ve voted against board members for their role in the financial crisis. If you were an AIG executive or board member pre-crisis, you’ve shown an inability to monitor a company and don’t deserve to serve on other boards.
We’ve also backed many of the more popular shareholder proposals, such as a declassified board, eliminating supermajority voting requirements and eliminating director elections by plurality of votes as opposed to majority. These proposals all give the shareholder more power. They may not pass the first few years, but sometimes the company will propose the changes themselves after they receive strong support the previous year, at which point they’ll usually pass.
One of the guidelines which frequently results in our voting against management is no CEOs on the board. A board full of CEOs makes sense on some levels—these are supposedly the brightest business minds in the world. On the other hand, being a CEO is an all-consuming job. Sitting on a board consumes about 20 hours a month and that number can increase when a company is in trouble.* And CEOs often sit on multiple boards. If the CEO sits on 2 boards, that’s 40 hours a month, or a typical work week each month.
A company which many of our clients hold, Procter & Gamble(PG), has 5 CEOs on the board, tied for highest among S&P 500.* While this didn’t prevent us from investing in the company, we continue to vote against the CEOs when they’re up for election. PG was asked about its board composition and the response included the board’s high level of attendance (97% attendance over the last year).*
The board has the CEO of Hewlett-Packard, Meg Whitman, and the CEO of Frontier, Maggie Wilderotter, among others. Neither of these companies is exactly thriving, which means the CEO’s have to spend time with their own issues, which most likely get priority over their PG commitments. Attendance is great, but is the board challenging the current PG CEO Robert McDonald? Given that he’s also the Chairman (which we don’t approve), it’s not hard to imagine quick meetings where the board rubber stamps McDonald’s proposals.
Another issue with a CEO filled board is the cross pollination. If you sit of PG’s board and want the CEO fired or pay cut, you may refrain from speaking out if you’re also a CEO. If PG cuts the pay of its CEO, maybe they’ll cut my pay since we’re all benchmarked to each other. The opposite can be true as well—vote for a raise while you sit on a board, then your salary seems lower and maybe you deserve a raise as well. Pretty soon raises are being given out for poor performance and no CEOs are being fired.
The composition of boards has changed over the last 10 years. Newly elected independent directors used to be mainly CEOs or other active high-level executives (53%) but are now only 26%.* Our ideal board would be 100% independent with a mix of backgrounds—a retired CEO from the industry, an accountant and/or corporate lawyer, an investor and retired executive from another industry. This board would be small enough that all voices could be heard, conflict free, have the time to serve and the background to properly guide the company.