Cognizant Technology Solutions $CTSH – Proxy Score 75

Cognizant Technology Solutions (CTSH) is one of the stocks in my portfolio. Their annual meeting is coming up on 6/4/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 5/23/2013.  I voted with management 75% of the time.  View Proxy Statement.

 Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.

Few firms admit to having average executives. They generally set compensation at 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, with 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. The rationale for peer group benchmarking is a mythological market for CEOs.

CTSH’s Summary Compensation Table shows Francisco D’Souza, CEO, was the highest paid named executive officer (NEO) at about $10.6M in 2012. I’m using Yahoo! Finance to determine market cap ($19.3B) and Wikipedia’s rule of thumb regarding classification. CTSH 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.

CTSH’s pay is below median when we factor inflation.  Therefore, I voted for the pay package and stock plan.  However, I notice that  Lakshmi Narayanan holds no stock in our company even after serving on the board for more than 10 years, so I voted against him. I can think of no good reason for being on a board for 10 years and not investing one cent in the company. My imagination runs wild with bad reasons.

Professor Stephen Bainbridge and I often disagree, but not on this issue:

I certainly agree that directors should have a fair bit of skin in the game. If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second. (My good friend Charles Elson’s work in this area is seminal and excellent. See, e.g., this video and his article Director Compensation and the Management-Captured Board—The History of a Symptom and a Cure, 50 SMU L. REV. 127 (1996).)

Arbitrary dollar amounts, however, are a very bad idea. To somebody like Bill Gates, the prospect of losing $1 million is trivial. To somebody like me, the prospect of losing $250,000 would be so scary that I would refuse to serve on the board.

The right approach is to require the director to put a non-trivial percentage of his net worth at risk.

There are now five board members who have served for at least a decade and three directors who are over 70 years old, signaling possible succession planning concerns.

I voted in favor of John Chevedden’s proposal to provide shareowners the right to act by written consent. This is simply good governance. I have made such proposals myself at several companies.

How I voted (CorpGov) below:

# PROPOSAL TEXT MGMT CorpGov CBIS Calvert CalSTRS
1a Elect Director Maureen Breakiron-Evans For For For For For
1b Elect Director John E. Klein For For For For For
1c Elect Director Lakshmi Narayanan For Against For For For
2 Advisory Vote to Ratify Named Executive Officers’ Compensation For For For For For
3 Declassify the Board of Directors For For For For For
4 Amend Qualified Employee Stock Purchase Plan For For For For For
5 Ratify Auditors For For Against For For
6 Provide Right to Act by Written Consent Against For For For For

Stockholders who intend to have a proposal considered for inclusion in our proxy materials for presentation at our 2014 Annual Meeting of Stockholders pursuant to Rule 14a-8 under the Exchange Act must submit the proposal to our Secretary at our offices at Glenpointe Centre West, 500 Frank W. Burr Blvd., Teaneck, New Jersey 07666, in writing not later than December 20, 2013.

  Looking at SharkRepellent.net, CTSH has a classified board. I expect that will be taken care of this year, since the board is sponsoring a declassify proposal. Special meetings can only be called by shareholders holding not less than 25% of the voting power; I think that should be 10%. They also have a supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.

Cognizant Technology Solutions Corporation’s ISS Governance QuickScore as of May 1, 2013 is 10. The pillar scores are Audit: 1; Board: 9; Shareholder Rights: 10; Compensation: 9. Brought to you by Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosure.

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