PROXY SEASON 2014

Proxy season has begun and, again, investors should notice what should be a disquieting pattern of information presentation. To begin with, it seems that an inordinate amount of space is devoted to executive compensation leading to a non-binding vote. The notion that, through the vote shareholders have a real say in the important issues involving corporate governance only becomes apparently ridiculous after reading through the proxy material.

Without naming names (you know who they are), companies that experienced significant reduction in share values in the period from 2008 through 2013 did not seem to reflect any comparable reduction in executive compensation. Instead, compensation appears to have increased over that time period. And, even if an individual shareholder was unhappy with the compensation packages, a NO vote by an individual shareholder is useless as a governance tool as it is non-binding. Millions of shares in corporate America are owned by institutions and, unless they, jointly take action to protest executive compensation nothing will happen.

Despite the overly generous rewards to corporate executives the proxy material does not provide any disclosure of the specific contributions of the executives being rewarded that would justify their compensation levels. Shareholders must just accept, on faith alone, that they are worth it. Yet, only in rare instances are the compensations of the few the most important part of the profit picture. Today’s CEO’s have become America’s royalty with all of the accompanying perks.

It is also interesting to read the “shareholder proposals” and recognize that very few, if any, ever obtain a management recommendation for a yes vote. Management always seems to be able to write a detailed argument for voting against the shareholder proposals no matter how meritorious they may be and rarely does management ever present its own proposal covering the same issue.

Shareholders should question whether or not the “independent directors” are really “independent” or just go along with management recommendations. There are too few examples of directors challenging or opposing the recommendations of the CEO and executive management team to convince shareholders of independence. Rarely, when shareholders are asked to vote for directors (new or re-elected) are they provided information detailing the expertise of the nominees that would be most helpful in managing the company. More attention seems to be paid to “politically correct” nominees.

Despite attempts of the regulator to “level the playing field”, the investing game remains the province of the institutions and traders. The market is a trader’s market with high speed trading adding a level of de-stabilization and leading to the ability of a few to “front run” the market. Despite regulation attempts to cause full disclosure, the typical individual gets his or her information long after the “professionals” received theirs and, more importantly, long after the critical time to take action on the information.

Years ago, before the “information age” investors bought shares for the long term and what happened on a quarter to quarter basis was not the driving force. Brokers advised clients to buy a stock and “just put it away”. It those days that was a good strategy. But, now the entire focus of the market is short term with little, if any, discussion on investing in a security for the long term. This short term focus is not beneficial to the typical individual investor but rewards the short term trading accounts.

Unfortunately, this is the environment within which individual shareholders are asked to vote their proxies. It is very difficult to come up with a plan to cure the negative governance and market problems but it may be worth the effort to try.

Leave a Reply

Your email address will not be published. Required fields are marked *