Ellie Mae Inc $ELLI: Proxy Score 40

Ellie Mae Inc (ELLI) 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 5/19/2013.  I voted with management 40% 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.

ELLI’s Summary Compensation Table shows Sigmund Anderman, CEO and Chairman, was the highest paid named executive officer (NEO) at about $7M in 2012. I’m using Yahoo! Finance to determine market cap ($590M) and Wikipedia’s rule of thumb regarding classification. ELLI 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.

ELLI’s pay is above median, even without factoring inflation. Additionally, the board has not executed a formal CEO employment agreement or established a formal clawback policy regarding executive incentive pay. Therefore, I voted against the pay package and members of the compensation committee: A. Barr Dolan, Chairman. Unfortunately, ELLI maintains a classified board. Therefore, I couldn’t vote against Craig Davis and Bernard M. Notas.

I don’t like the fact that there are no women on the board out of nine seats. I also don’t like the fact that directors Dolan (8 years on Board), Frank Schultz (13) and Jeb S. Spencer (2) don’t own any stock.  That is another reason for voting against Dolan and also caused me to vote against Schultz. 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.

How I voted (CorpGov) below:

Mark your calendar:

To be considered for inclusion in our proxy materials for next year’s annual meeting, your proposal must be submitted in writing by December 17, 2013, to our Secretary at 4155 Hopyard Road, Suite 200, Pleasanton, California 94588; provided that if the date of the annual meeting is earlier than April 29, 2014 or later than June 28, 2014, the deadline is a reasonable time before we begin to print and send our proxy materials for next year’s annual meeting.

  Looking at SharkRepellent.net, I see ELLI has a classified board with staggered terms and a plurality vote standard to elect directors with no resignation policy. No action can be taken without a meeting by written consent. Shareholders cannot call special meetings. There is a supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.

Ellie Mae, Inc.’s ISS Governance QuickScore as of May 1, 2013 is 7. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 7; Compensation: 6. 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.

With so few shareowners rights and fairly mediocre performance over the last several years, this may be a good company for concerted action at next year’s meeting. If interested, contact me on Sharegate.com.

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