The culture of capitalism fits well with the spirit of democracy where, in both systems, people and ideas compete for the approval of those governed. Shareholder elections take place each year when companies send out proxies soliciting votes from individual shareholder/owners. In fact, capitalism would probably work better if more investors took these referendums seriously, as May-Investments does on clients’ behalf.
May-Investments may be in the minority of investment advisor firms that vote proxies on behalf of clients. Key proxy issues include approving executive compensation and authorizing future incentive plans, whether the company should require an independent Chairman of the Board, and electing directors for the upcoming year.
May-Investments reviews each company election independently to determine how we will vote client shares. Given the outsized compensation packages that most boards approve for their executives, May-Investments believes that most boards are abdicating their fiduciary responsibility to shareholders, and that most executive teams are more skilled at absconding with company assets than they are at managing the enterprise. In our view, C.E.O.’s that have failed to grow earnings for a period of years, and whose company stock price has failed to rise along with earnings power, do not deserve the multi-year multi-million dollar pay packages which are the industry norm. To generalize, we tend to vote against approval for overly generous pay packages and we typically vote against the directors that have approved such corporate largess after confirming that these board members are often paid in excess of a quarter-million dollars in exchange, it seems, for playing the part of C.E.O. sycophant.
While the Occupy Wall Street movement might delight in our voting “against” the 1%, we would prefer to think that our clients are more Ayn Randian in our demands that owner representatives be more parsimonious with shareholder resources. Ayn Rand likes to see success rewarded. But first, there must be success. We vote not the politics of envy, but we do desire accountability.
Apple's board of directors approved a pay package for new C.E.O., Tim Cook, of $900,000 cash and a $378 million stock grant, just for taking the job. Seriously? They tried to give him a sufficiently large equity position to persuade him to focus on the task at hand. In reality, even if Apple's stock plummets 75 percent, they will have paid him nearly $100 million to preside over the Titanic. Not a bad gig, if you can get it, but what was the Apple board thinking?
In the relatively few instances where corporations have delivered on promises of earnings growth and shares have appreciated to reflect that performance, we will give managers and boards the benefit of the doubt and approve very generous pay packages. In most cases, however, managements are being paid too much and our vote reflects our displeasure with how salaried employees are raiding the nesteggs of passive retiree-shareholders.
Increasingly, shareholders are proposing their own election items. Frequently, shareholders will propose an independent Chairman, forcing management to relinquish key responsibilities to someone better able to represent outside shareholders. Despite management’s recommendation that shareholders reject these proposals, we typically concur that anything to give shareholders better representation is an idea worthy of support. Shareholder proposals to install better controls on executive compensation are also likely to receive support, unless the company has been able to grow earnings and shareholder value materially during previous years.
While not everyone will agree with our willingness to vote against management on these issues, we think it is necessary to look out for clients’ best interest. I can think of very few clients who would disagree with my view that most managements are drastically overpaid. As a fiduciary, voting client shares on their behalf, I believe that our vote should reflect this point of view. Further, for capitalism to reach its potential, boards should be holding managements accountable.
During proxy season, many magazines publish articles ranking the most- and least-overpaid corporate chieftans. We hope that you’ll appreciate that you are not sitting out this election. Hopefully the directors at Citigroup and other companies will accept the responsibility with which they’ve been blessed. We are looking to invest in profitable companies at attractive prices. It is also important to send the message to boards that compensation packages should enrich managers for achieving success instead of enriching every Tim, Vik & Mary who manages to land the job. After all, as Apple's board may yet learn, past performance may not necessarily be an indication of future success.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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