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iRobot Corporation (IRBT) Shareowners Should Vote for Proxy Access

, 05/15/2013 ,

iRobot Corporation ($IRBT) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/22/2013. ProxyDemocracy.org had collected the votes of no funds when I checked on 5/13/2013. I’ll check back and may post again on IRBT before the voting deadline. 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.

IRBT’s Summary Compensation Table (Page 27. Would it kill them to include a hyperlinked index?) shows Colin M. Angle, CEO and Board Chairman, was the highest paid named executive officer (NEO) at about $3.3M in 2012. I’m using Yahoo! Finance to determine market cap ($914M) and Wikipedia’s rule of thumb regarding classification. IRBT is a small-cap company. 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.

IRBT’s pay is substantially above median, even when factored for inflation.  Therefore, I voted against the pay package and against compensation committee chairman, George C. McNamee. I would have also voted against the other members of the compensation committee but IRBT uses a classified board, so they aren’t up for election.

Of course, I also voted for my own proposal to provide proxy access. The proposal presents two optional routes for shareowners seeking to place director nominees on IRBT’s proxy:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or
b. Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

Both parties are limited to nominating 24% of the board, each so in the case of IRBT that would be 2 out of 10. Unique to this form of proxy access proposal, no party can overlap or use both options. If two shareowner nominating parties arose, invoking both options then 4 directors out of 10 could possibly be replaced.

That might be considered “substantial change,” but not in the conventional sense, since neither party comes close to “control” with 2 out of 10 directors. We are hoping to create a new model of corporate governance where no one party “controls” the corporation. Such a multiparty structure will increase the likelihood that corporations are presented with alternatives… not just the company’s Plan A, or a challengers Plan B but also maybe a Plan C.

Corporate elections are just beginning a transition from contests among oligarchies to something more akin to democracy. The idea of multi-party elections may seem novel or foreign to the corporate governance industrial complex that has grown accustom to contests in which one side or the other is awarded with a victory, not much different than the spoils of war. We believe such multi-party monitoring will lead to less focus plundering by those in control and more on growing the business through sustainable long-term methods.

With regard to why IRBT was chosen as a specific target for proxy access: Our company’s stock price declined over the last two years. Our CEO chairs the board. A June 2012 GMI Ratings report found that companies with a separate CEO and chair provide investors with five-year shareowner returns nearly 28% higher than those with combined roles. Our company has a classified board elected on a plurality basis.

The board is authorized to increase or decrease the size of the board without shareowner approval. Directors may only be removed for cause and only by the vote of 75% of the shares entitled to vote. Four of our ten directors who have served on the board from 1 to 7 years hold no actual stock in our company. Can you imagine serving on our corporate board without holding stock in the company? What does that say about their confidence and commitment?

Unlike most US companies, the charter of the audit committee does not require the committee to meet with the internal auditors outside the presence of management. Why is management afraid to leave the room? iRobot’s disclosure on sustainability issues is very minimal. The company does not publish a sustainability report and does not dedicate a page on its website to safety or the environment.

Shareowners cannot call a special meeting or take action by written consent. A supermajority is required to amend specific bylaws. Our company even has a poison pill not ratified by shareowners. These poor governance policies make it difficult for shareowners to hold individual board members accountable. It is time we allowed shareowners to nominate conscientious independent directors who will move our company forward.

 Looking at SharkRepellent.net, their mean bullet proof rating of IRBT is practically off the chart. The FactSet TrueCourse Bullet Proof Rating is a weighted average index comprised of significant components that impact takeover defenses. The rating scale is from 0 to 10 with a 10 representing the most formidable defenses. The rating system is a relative measurement and is not intended to measure the probability of a successful defense. Statistics are based upon the number of eligible and active companies in the SharkRepellent.net database.

Mean Bullet Proof Ratings 
 9.25 Company
 2.36 S&P 500
 3.59 S&P 400
 3.55 S&P 600
 3.17 S&P 1500
 1.35 DJIA
 2.46 Fortune 500
 2.89 Russell 1000
 3.67 Russell 2000
 3.41 Russell 3000
 2.36 Nasdaq 100
 3.49 SharkRepellent
 3.89 SIC Group

Similarly, ISS also rates IRBT as offering virtually no rights to shareowners. iRobot Corporation’s ISS Governance QuickScore as of May 1, 2013 is 5. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 10; Compensation: 2.  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.

In their opposition statement of my proxy access proposal, unnamed agents of our Company state it

could be required to verify the share ownership of possibly numerous individuals each year… We do not think that such investigations constitute the best use of the Company’s resources. Allowing stockholders who exhibit such an immaterial investment in the Company to make nominations using the Company’s proxy materials could lead to the election of “special interest directors” who may be inclined to represent the interests of the stockholders who have nominated them rather than the overall interests of all stockholders.
The company sought a no-action letter from the SEC based on several allegations: vague, misleading, and interferes with business operations. The SEC rejected all of these pretenses of opposition. However, notice that IRBT made no objection to the SEC that I did not own sufficient stock to put forward a proposal. They accepted the verification of my holdings according to my broker required under SEC Rule 14a-8(b)(2)(i). It is a simple process, not one that would impose a burden on our Company.

Unnamed agents of our Company allege that under my proposal, shareowners with an “immaterial investment” would be eligible to make nominations using the Company’s proxy materials. Since when is $4.5 million “immaterial”? I don’t think it would considered such by most people. Unnamed agents of our Company appear to believe a ragged group of 50 shareowners, holding an average of nearly $90,000 each in IRBT stock, “could lead to the election of ‘special interest directors.'”

Yet, they fail to explain how ‘special interest directors” would win. It certainly wouldn’t be as a result of the votes of the 1% or 1/2% nominating. Insiders own more than 5% of our Company. The top ten institutional investors, such as BlackRock, Vanguard and Morgan Stanley own more than 37%. Institutional investors own about 75% of our Company. Why would such investors elect “special interest directors”? Obviously, they would seek to elect the best directors to serve the interests of their clients, the ultimate shareowners… hardly a special interest.

How I voted (CorpGov) below:

Mark your calendar:

Pursuant to Rule 14a-8 promulgated under the Exchange Act, in order to be included in the Proxy Statement and form of proxy relating to our 2014 Annual Meeting, we must receive any proposals of stockholders intended to be presented at the meeting no later than December 12, 2013. In addition, any proposals must comply with the other requirements of Rule 14a-8.

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