As some readers noted, I put in more effort at Reeds Inc. (REED) than at many of my other holdings, proposing proxy access and writing about the problems at Reeds four times before the annual meeting, even doing a short video.
My rationale is that while I am a small shareowner at both Apple and Reeds, for example, my proportionate share at Reeds is much larger. So, focusing more on Reeds makes sense for me personally. In addition, while other companies in my portfolio get plenty of attention from the financial press and often from other shareowner activists, Reeds does not. Additionally, although Reeds has great products, it is far from reaching its full potential.
I recommended against directors Muffoletto and Fischman because they own no shares, for a say-on-pay frequency of once each year to ensure annual accountability and, of course, I favored my own proxy access proposal to give shareowners a stronger voice going forward. Glancing at the 8-K report filed by Reeds after the AGM, you might think shareowners were in complete agreement with management. However, further analysis reveals otherwise.
Consider that approximately 3,354,911 shares are owned by the Reed family, board members and corporate officers. I think we can safely assume these shares were voted as recommended by the board. The following analysis of several votes provides additional insight into how shareowners, other than these insiders, voted.
|1.||Election of Directors|
|Vote For||Minus Insiders||Withheld||Non-Vote|
|Christopher J. Reed||4,998,882||1,643,971||658,640||3,941,509|
|Judy Holloway Reed||4,841,625||1,486,714||815,897||3,941,509|
|Daniel S.J. Muffoletto||3,567,408||212,497||2,090,114||3,941,509|
With regard to the board, it appears that both Muffoletto and Fischman would have lost without the vote of insiders.
I had a chance to meet Daniel Muffoletto at the Reeds annual meeting and now have a better understanding as to why he isn’t a shareowner. He is concerned that ownership, especially of options, might lead to a conflict of interest. Directors might be tempted to game the stock for their own financial gain, as may have been a contributing factor to the downfall of Enron.
While I understand his position, his total lack of ownership and the minimal payments to directors for fulfilling their duties leads me to assume he serves on the board either as a favor to Chris Reed or because he gets pleasure out of being associated with the company. Whatever his motivation, I don’t think board governance at Reeds is structured to provide adequate motivation for directors to build the kind of company I would like to see.
|4.||Proposal for the frequency for the advisory vote on the compensation of our named executive officers.|
|3 Yrs. Minus||Broker|
|3 Years||Insiders||1 Year||Abstain||Non-Vote|
Without the vote of insiders, the one year say-on-pay frequency clearly would have won. Reeds is ignoring the wishes of the majority of its outside investors who want to be able to vote each year on this item. Although insiders can govern by their own whims, they risk alienating outside investors who may be their best customers and best sales people. Current corporate governance standards at Reeds make it difficult to attract investment from institutional investors, such as those belonging to the Council of Institutional Investors (CII) with combined assets that exceed $3 trillion. For example, CII policy on this issue clearly favors an annual vote.
5.2 Advisory Shareowner Votes on Executive Pay: All companies should provide annually for advisory shareowner votes on the compensation of senior executives.
|5.||Shareholder Proposal entitled “Proxy Access for Shareholders”|
Although my proxy access proposal still would have lost, it would have been a lot closer without the insider vote. The vote of outside investors was 1,322,224 votes against vs 882,408 votes for. 40% of the vote isn’t bad, considering proxy access is still a new concept to many shareowners.
I found the annual meeting very interesting, informative and believe it opened up the process for future dialogue. Shareowners and management sat around a large conference table for more than two hours of mostly positive discussion, although some additional weaknesses were also revealed. I have several recommendations for Reeds and will be communicating them privately via e-mail until we get closer to the 2014 meeting. Happy to hear from readers on additional steps that could be taken at this company.
REED stock was priced at $6.82 as of the AGM (12/20/2013) and as high as $8.92 more recently. If Reeds can reach sustained profitability, it still has plenty of room to grow. Meanwhile, try the Kombucha.