Cisco: How I Voted – Proxy Score 83%

Cisco ($CSCO) is one of the stocks in my portfolio. Their annual meeting is coming up on 11/15/2012. had collected the votes of five funds when I voted on 11/8/2012.  I voted with management 83% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank will be voted in favor of management’s recommendations. (See Don’t Let Companies Change Shareholders’ Blank Votes)

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.

Few firms want to admit to having average executives. They survey executive compensation at corporations and then set compensation packages that are above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average and their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third-world.

CSCO’s SummaryCompensation Table shows John T. Chambers, Chair and Chief Executive Officer, was the highest paid named executive officer (NEO) at about $11.7M in fiscal 2012. I’m using Yahoo! Finance to determine market cap and Wikipedia’s rule of thumb regarding classification. According to those sources, at about $89.4B CSCO is a large-cap company. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at large-cap corporations was $10.8 million in 2010.


Allowing for inflation of 6.1%, that would bring adjusted median income up to almost $11.5M, so CSCO’s pay is above that median. I realize CEO pay is increasing faster than inflation, but I’m trying to hold the line, since I think most have been overpaid for years. However, since the pay isn’t far off from median, I also look to how to funds reporting on voted.  Two out of five voted against the pay package, while three out of five voted against amending the executive bonus plan.  I decided CSCO was close enough and voted for both the compensation and bonus plan. Hopefully, I won’t regret it. I voted against Chambers, since I don’t think CEOs should also serve on their board.
With regard to Kenneth Steiner’s proposal to split the CEO and chair positions, as far as I’m concerned that’s a no-brainer. I voted in favor of it. How can a CEO act with independent judgement as a chair in evaluating himself? Paul Hodgson, Chief Communications Officer and Senior Research Associate at GovernanceMetrics International, put this more eloquently (The Costs of a Combined Chair/CEO, HLS Forum on Corporate Governance and Financial Regulation, 7/13/2012):
The two most authoritative positions in a boardroom are the CEO and the chairman. However, when these roles are combined, all the authority is vested in one individual; there are no checks and balances, and no balance of power. The CEO is charged with monitoring him or herself, presenting an obvious conflict of interest. Indeed, if the CEO is responsible for running the company, and the board is tasked with overseeing the CEO’s decisions in the interests of shareholders, how can the board properly monitor the CEO’s conduct if he or she is also serving as board chair?
A recent report he wrote with Greg Ruel also found that not only does splitting the  positions reduce conflicts of interest, it generally less expensive. They also conclude combining positions is correlated with other governance failures:
Companies that combine the roles of CEO and chair score far worse in our ESG model, which evaluates companies using GMI Ratings’ comprehensive list of ESG KeyMetrics, as well as scoring far worse on our AGR Ratings, which test for fraud and financial restatements, among other quantitative accounting items. Furthermore, shareholder returns over an extended period seem to be favorable for those companies which separate the CEO and chairman roles. Indeed, there appears to be very little benefit to long-term shareholders in having a combined CEO and chair. The only benefit seems to be an economic one to those CEOs who have convinced the board to allow them also to serve as chair.
With regard to John Harrington’s proposal to undertake a study on conflict minerals, I voted for it, along with all the funds reporting on I agree with Harrington, such a study and adequate followup could enhance Cisco’s corporate reputation, improve employee recruitment and retention, improve community and stakeholder relations, as well as reduce risk of adverse regulatory action, negative publicity, divestment campaigns, and lawsuits.

How I Voted; see below under CorpGov:

1a Carol A. Bartz For For For Against Against For
1b Marc Benioff For For For For Against For
1c M. Michele Burns For For For For Against For
1d Michael D. Capellas For For For Against Against For
1e Larry R. Carter For For For Against Against For
1f John T. Chambers Against Against For Against Against For
1g Brian L. Halla For For For For Against For
1h John L. Hennessy For For For For Against For
1i Kristina M. Johnson For For For For Against For
1j Richard M. Kovacevich For For For For Against For
1k Roderick C. McGeary For For For For Against For
1l Arun Sarin For For For For Against For
1m Steven M. West For For For Against Against For
2 Amend Exec Bonus Plan For Against For Against Against For
3 Ratify NEO Compensation For Against For For Against For
4 Ratify Auditors For For Against Against For For
5 Require Independent Chair For For For For For For
6 Report on Conflict Minerals For For For For For For

Looking at for possible corporate governance improvements for next year. I see the Board is authorized to increase or decrease the size of the board without shareholder approval. That seems like something that could potentially be abused. The Council of Institutional Investors includes the following language in their Corporate Governance Policies:

2.11 Board Size and Service: Absent compelling, unusual circumstances, a board should have no fewer than five and no more than 15 members (not too small to maintain the needed expertise and independence, and not too large to function efficiently). Shareowners should be allowed to vote on any major change in board size.

It might be a reasonable precaution to require shareowner approval of any change in board size. Here’s the deadline for next year’s proposals:

Shareholders of Cisco may submit proposals on matters appropriate for shareholder action at meetings of Cisco’s shareholders in accordance with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in Cisco’s proxy materials relating to its 2013 Annual Meeting of Shareholders, all applicable requirements of Rule 14a-8 must be satisfied and such proposals must be received by Cisco no later than May 29, 2013. Such proposals should be delivered to Cisco Systems, Inc., Attn: Secretary, 170 West Tasman Drive, San Jose, California 95134-1706 (and we encourage you to send a copy via email to [email protected]), with a copy to Cisco Systems, Inc., Attn: General Counsel at the same address.

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