Dreamworks Animation $DWA: Vote One-Vote Per Share Plan – Proxy Score 42

Dreamworks Animation Skg Inc (DWA) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/29/2013. ProxyDemocracy.org had collected the votes of one fund when I checked on 5/17/2013.  I voted with management 42% 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.

DWA’s Summary Compensation Table shows Jeffrey Katzenberg, CEO, was the highest paid named executive officer (NEO) at about $5.2M in 2012. I’m using Yahoo! Finance to determine market cap ($1.8B) and Wikipedia’s rule of thumb regarding classification. DWA is a small-cap company category. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at small-cap corporations was $2.2 million in 2010.

DWA’s pay is above median when we factor inflation.  Therefore, I voted against the pay package, stock plan and members of the compensation committee: Mellody Hobson, Chair and Thomas Freston. Nathan Myhrvold is not standing for reelection.  Another reason for voting against Freston is that he owns no shares in DWA. I also voted against Harry M. Brittenham and Michael J. Montgomery for that reason. I can think of no good reason for being on a board for 5-7 years, as each of these directors has been, and not investing one cent in the company. My imagination runs wild with bad reasons.

I would have voted against Richard Sherman, who has been on our Board for 5 years, holds 100 shares, but he isn’t standing for reelection. 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.

I don’t know Sherman’s net worth, but I assume $2,200 doesn’t meet this standard.

The main problem with DWA is the unequal voting. The Katzenberg-Geffen-Allen Group includes holdings of CEO, Director and co-founder Jeffrey Katzenberg, co-founder David Geffen, and the Class B Stockholder Agreement, which gives these shares 15 times the voting power. As long a this arrangement continues, I would expect to see continued related-party transactions, like the aircraft sublease agreement with a company owned by Katzenberg and Steven Spielberg, the charter arrangements with David Geffen, the “Spielberg License Agreement” re trademarks and such, other services from entities controlled by Steven Spielberg, a consulting agreement with David Geffen, and on and on. Is it any wonder the price of the stock is down over the last two and five year periods?

Significant corporate governance measures are set forth in the “Vulcan” stockholder agreement, which provides that the Board of Directors shall consist of the following:

  • The DreamWorks Animation’s Chief Executive Officer;
  • one individual designated by Jeffrey Katzenberg or entities controlled by him, for so long as he controls an entity that holds Class B Stock (while Jeffrey Katzenberg is DreamWorks Animation’s Chief Executive Officer, he is deemed to be such designee);
  • one individual designated by David Geffen, for so long as he controls an entity that holds Class B Stock; and
  • such number of individuals selected by the Nominating and Governance Committee (or as described in the following paragraph) as will bring the total number of directors to the number of directors that constitute the “entire Board” (as defined in DreamWorks Animation’s restated certificate of incorporation).
Sometimes I submit shareowner proposals that have little chance of passage but that point to serious issues. My proposal for a recapitalization plan to yield one-vote per share at DWA may be one such case of tilting at windmills. However, my hope is that if the vast majority of Class A shares are voted in favor of the proposal, the “Trigger Date” may be accelerated and we can finally get a vote to amend the bylaws.

How I voted (CorpGov) below:

Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), stockholders may present proper proposals for inclusion in our Proxy Statement and for consideration at our next annual meeting of stockholders. To be eligible for inclusion in our 2014 Proxy Statement, your proposal must be received by us no later than December 27, 2013, and must otherwise comply with Rule 14a-8.

  Looking at SharkRepellent.net, I see DWA has a plurality vote standard to elect directors with no resignation policy. Special meetings may only be called by shareholders holding not less than a majority of the voting power. Of course, these and others are minor issues in comparison with the vote power of Class B shares.

DreamWorks Animation SKG Inc.’s ISS Governance QuickScore as of May 1, 2013 is 10. The pillar scores are Audit: 1; Board: 10; Shareholder Rights: 8; 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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