H&R Block: I Voted for Proxy Access

H&R Block ($HRB) is one of the stocks in my portfolio. Their annual meeting is coming up on 9/13/2012. ProxyDemocracy.org had collected the votes of two funds when I voted on 9/5/2012.  I voted with management 40% of the time but in complete alignment with CalSTRS.

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions where something obviously warrants different treatment. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay, Oxford Review of Economic Policy, Vol. 21, Issue 2, pp. 283-303, 2005), aggregate compensation by public companies to NEO increased from 5 percent in 1993-1995 to about 10 percent in 2001-2003.

On that basis, I voted against the pay plan and against the compensation committee members: Bruce C. Rohde, Marvin R. Ellison, Tom D. Seip, James F. Wright.

Of course, I also voted in favor of Kenneth Steiner’s proxy access proposal (HRB-ProxyAccessProposal pdf, p. 73), which I and others at the United States Proxy Exchange (USPX) helped to design. I discussed the rationale for the proposal previously on corpgov.net and on the Harvard Law corpgov site. Download a PowerPoint presentation and/or read the paper (pdf).

When we crafted our model proxy access proposal, we carefully reviewed the SEC’s Rule 14a-11, which was thrown out by the D.C. Circuit Court of Appeals for underestimating the amount companies would spend to retain entrenched directors. The proposal included a number of onerous features, including a requirement that any nominating party have held 3% of a company’s stock for 3 years. The only justification the SEC offered for this was the following:

… we believe that the 3% ownership threshold – combined with the other requirements of the rule – properly addresses the potential practical difficulties of requiring inclusion of shareholder director nominations in a company’s proxy materials …

That would limit proxy access at large companies to billionaires and groups of large institutional investors, since most, including the public pension fund giant CalPERS, own only a fraction of a percent of any one company. Convenience or cost savings should not justify the sweeping disenfranchisement of most shareowners in the nomination process. Therefore, we took a step back and identified possible justifications for eligibility requirements in descending from most reasonable to least reasonable:

1. Encouraging quality nominations by requiring effort or a large stake to nominate.
2. Avoiding a “dilution” effect of having numerous shareowner nominees competing for a limited pool of “opposition” votes.
3. Avoiding frivolous or nuisance nominations.
4. Keeping nominations to a manageable number for convenience or to limit election costs.
5. Limiting nominations to certain parties, such as influential shareowners, based on a belief that they deserve a greater right to nominate.

We predicated the USPX Model Proposal eligibility requirements primarily on the first item, although we also see value in items 2-4. The USPX Model Proposal’s eligibility requirements are designed to impose the least disenfranchisement necessary to achieve the goal of encouraging quality nominations by requiring a huge effort or a large stake to nominate.

Common features of the USPX proposals are as follows:

• Precatory to afford flexibility.
• One nominee (12% of board) per nominating party.
• Nominating parties can’t coordinate nominations.
• Two alternatives to satisfy ownership requirement:
  • Party holding 1% of shares for 2 years, or
  • Party of 50 shareowners each holding $2,000 for 1 year

Previous proxy access proposals using the USPX achieved a positive vote up to 32% at Princeton National Bancorp (PNBC). However, several funds and proxy advisors objected to the fact that our original proposals had no cap on the number of directors that could be nominated by shareowners, “which is an essential safeguard of any proxy access right,” according to proxy advisor ISS.

The proposal at HRB addresses this issue by setting an overall cap of 2 nominations (24% of board) each for 1% holder groups and 50 shareowner groups. Therefore, no more than 48% of the board could be replaced by this proposal. There can be no “change of control.”

Our approach favors nominations from long-term shareowners who believe directors from different backgrounds and focused skill sets are critical if boards are to avoid “group think,” which played a significant role in the recent financial crisis.

Too many proxy contests are won by either entrenched boards, who then continue bad corporate governance practices or by corporate raiders looking for a quick bump in sock price so they can sell and move on to their next conquest. Instead of board elections being contests of control by those seeking to dominate, we aim to create conditions where directors bring a broader diversity of skills and perspectives, cooperating with each other to create more dynamic boards.

The USPX model proposal, submitted at HRB by Ken Steiner, gives voice both to median and small institutional investors, as well as sophisticated groups of retail shareowners. Widespread implementation could move corporate elections to become more meaningful events with issues more fully debated and more qualified/diverse candidates elected. Diversified boards offer the best chance for the most productive boards (see the recent research from Credit Suisse, Gender Diversity and Corporate Performance, showing boards with women performed 17% better).

Specific reasons for targeting HRB are as follows:

• Underperformed competitor Intuit (INTU) over last 5 years by approximately 120%.
• Rated “high concern” on executive pay by GMIRatings.
• Short-term focus of incentive compensation.
• Combined with tax gross-ups, executive pay practices not aligned with shareholder interest.
• Unanimous written consent required without a meeting.
• Special meetings only with 50%+.
• Supermajority vote requirement (66.67%) to approve mergers.
• 4 directors held no stock (alignment).
• 80% shares required to amend bylaws.