Costco Wholesale Corporation $COST is one of the stocks in my portfolio. Their annual meeting is coming up on 1/30/2014. ProxyDemocracy.org had collected the votes of two funds when I checked and voted on 1/19/2014 (They now show five). I voted with management 25% 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.
Costco’s Summary Compensation Table shows CEO W. Craig Jelinek, was the highest paid named executive officer (NEO) at about $5.4M in 2013. I’m using Yahoo! Finance to determine market cap ($51B) and Wikipedia’s rule of thumb regarding classification. Costco is a large-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $9.7 million in 2012, so Costco is well under median. I voted in favor of the pay package and the auditor.
The GMIAnalyst report I reviewed gave Costco an overall D for several reasons, including a staggered board with plurality voting. Classified boards reduce accountability by allowing shareowners to only vote for board members every third year. Plurality voting allows unopposed directors to get elected with one vote. Crazy! It looks like only 2 of 14 directors have served for less than nine years. Five have served for twenty years or more. Based on these issues, I would be tempted to vote against all members of the board up for reelection. However, the kicker for me is the board’s opposition to their own proposal to declassify the board.
A board declassification proposal submitted by the Pension Reserves Investment Management Board with the help of Harvard’s Shareholder Rights Project passed with 72% of the vote last year. However, that apparently didn’t meet the 2/3 requirement of all shareowners under the bylaws. After meeting with large shareowners and perhaps in order to avoid total wrath from shareowners and proxy advisors, the board placed a measure on this year’s proxy ballot to declassify the board and introduce annual director elections. However the board is clear it would oppose the measure if legally allowed to do so. From the proxy:
Washington law provides that for an amendment to the articles of incorporation to be adopted the board “must recommend the amendment to the shareholders unless . . . the board . . . determines that because of conflict of interest or other special circumstances it should make no recommendation. . . .” If permitted by the Washington corporate statute, the Board would have provided the shareholders an opportunity to vote on the amendment but with a recommendation that shareholders vote against the amendment, because the Board believes that the current structure continues to benefit shareholders. Instead, the Board is making no recommendation because it believes that special circumstances exist: while the Board favors bringing the matter to a shareholder vote, each director has notified the Company that he or she, acting as a shareholder, intends to vote against the Proposal. The directors collectively own over two million shares. As a result, the Board has determined to make no recommendation.
The company is incorporated in Washington state. Chapter 23B.10 of the Washington Business Corporation Act requires the board to recommend in favor of an amendment in places in the proxy unless the board determines that, because of conflict of interest or other special circumstances, it should make no recommendation. Apparently, the board found such special circumstances. I don’t buy the board’s arguments. Less than 11% of the S&P 500 have a classified board. Allowing shareowners to vote on directors every year is simply good governance, providing a reasonable mechanism for accountability. I voted in favor of declassifying the board of directors.
Of course, I also voted in favor of my own proposal to adopt a simple majority standard. If Costco had a majority standard the 72% vote last year in favor of declassifying the board would have been adopted. Supermajority requirements lead to entrenchment and stagnation. A simple majority standard is simply good governance.
How I voted (CorpGov) below:
|1.1||Elect Director Susan L. Decker||For||Withhold||Withhold||Withhold|
|1.2||Elect Director Richard M. Libenson||For||Withhold||Withhold||Withhold|
|1.3||Elect Director John W. Meisenbach||For||Withhold||Withhold||Withhold|
|1.4||Elect Director Charles T. Munger||For||Withhold||Withhold||Withhold|
|3||Advisory Vote to Ratify Named Executive Officers’ Compensation||For||For||For||For|
|4||Adopt Simple Majority Vote||Against||For||For||For|
|5||Declassify the Board of Directors||None||For||For||For|
In order for a shareholder proposal to be included in the proxy statement for the 2015 annual meeting of shareholders, it must comply with the SEC Rule 14a-8 and be received by the Company no later than August 18, 2014.
Looking at SharkRepellent.net, as discussed above, directors are elected using a plurality standard and staggered terms, facilitating entrenchment. Costco has a supermajority vote requirement (66.67% of shares outstanding, not shares voted) to amend certain charter provisions. Additionally, no action can be taken without a meeting by written consent.
From Yahoo! Finance, Costco Wholesale Corporation’s ISS Governance QuickScore as of Jan 1, 2014 is 7. The pillar scores are Audit: 1; Board: 9; Shareholder Rights: 8; 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 disclosures. Vote “for” every item on the proxy ballot and watch those scores go up next year.