H&R Block, Inc. (HRB): How I Voted – Proxy Score 53%

hrb-logoH&R Block, Inc. $HRB is one of the stocks in my portfolio. Their annual meeting is coming up on 9/12/2013. ProxyDemocracy.org had collected the votes of two funds when I checked on 9/6/2013 and again on 9/9/2013.  I voted with management 53% 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.

HRB’s Summary Compensation Table (no link to page 47) shows William C. Cobb, CEO, was the highest paid named executive officer (NEO) at about $7.5M in 2012. I’m using Yahoo! Finance to determine market cap ($7.34B) and Wikipedia’s rule of thumb regarding classification. HRB is a mid-cap company. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at mid-cap corporations was $4.3 million in 2010.

HRB’s pay is above median when we factor inflation and the CEO’s total pay was more than three times the median pay for the HRB’s other named executive officers, raising concerns regarding effective and appropriate oversight, as well as succession planning.  Therefore, I voted against the pay package.  I also voted against the members of the compensation committee: Bruce C. Rohde, Chair, Marvin R. Ellison, Tom D. Seip, and James F. Wright. On the positive side, GMI notes “the board has executed a formal CEO employment agreement and has also established a formal clawback policy regarding its executive incentive pay.”  I also see that, according to GMI, all directors hold stock. Great to see that alignment. GMIAnalyst

I voted in favor of the auditor and for the company’s proposal to eliminate or limit directors’ personal monetary liability for certain breaches of fiduciary duty. That doesn’t sound like a positive but I don’t have time to research the issues and will trust CBIS and AFSCME on that issue. However, I voted against the company’s proposal to eliminate the current 12 year term limits on directors. Although I agree, experienced directors shouldn’t automatically be removed from the board, I think eliminating the cap with no other provision to ensure against stagnation is the wrong move. Perhaps after 12 years directors should no longer be considered independent by HRB or at least directors could be required to submit letters of resignation prior to their 12th anniversary. I’m willing to look at other options but just deleting the current cap doesn’t seem positive.

I also voted with CBIS and AFSCME in favor of Kenneth Steiner’s proposal to limit accelerated vesting of executive pay.

How I voted (CorpGov) below:

# PROPOSAL TEXT CorpGov CBIS AFSCME
1a Elect Director Paul J. Brown For For For
1b Elect Director William C. Cobb For For For
1c Elect Director Marvin R. Ellison Against For For
1d Elect Director Robert A. Gerard For For For
1e Elect Director David Baker Lewis For For For
1f Elect Director Victoria J. Reich For For For
1g Elect Director Bruce C. Rohde Against For For
1h Elect Director Tom D. Seip Against For Against
1i Elect Director Christianna Wood For For For
1j Elect Director James F. Wright Against For For
2 Ratify Auditors For Against For
3 Ratify NEO Compensation Against For For
4 Amend Articles For For For
5 Amend Articles Against For For
6 Pro-rata Vesting of Equity Plans For For For

For a shareholder proposal to be considered for inclusion in the Company’s proxy statement for the 2014 annual meeting pursuant to Rule 14a-8 of the SEC, the Company must receive notice at our offices at One H&R Block Way, Kansas City, Missouri 64105, Attention: Corporate Secretary, on or before March 31, 2014. Applicable SEC rules and regulations govern the submission of shareholder proposals and our consideration of them for inclusion in next year’s proxy statement and form of proxy.

  Looking at SharkRepellent.net, I see HRB defaults to a couple of problematic Missouri state statutes: unanimous written consent and supermajority requirements of 66.7% to approve mergers. In addition, special meetings can only be called by shareholders holding not less than 50.1% of the voting power.

ISS-MCIHRB’s ISS Governance QuickScore as of Aug 1, 2013 is 10. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 8; Compensation: 10. One is good; ten bad.  Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosure.

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