Apple Inc. (AAPL): How I Voted – Proxy Score 89

Apple Inc. (NASD:AAPL) is one of the stocks in my portfolio. Their annual meeting is coming up on 2/28/2014. ProxyDemocracy.org was down for maintenance when I checked and voted on 2/19/2014, so no voting advice there. I checked a few other sources such as CalPERS, Florida SBA and OTPP but none had disclosed their votes on their sites as of yesterday. I voted with 89% of the Board’s recommendations. View Apple’s 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. 

AAPL’s Summary Compensation Table (page 33; AAPL should have a hyperlinked index in our proxy) shows CEO Timothy Cook was the highest paid named executive officer (NEO) at about $4.25M in 2013. I’m using Yahoo! Finance to determine market cap ($485B) and Wikipedia’s rule of thumb regarding classification. AAPL is a mega-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $9.7 million in 2012, so they are well under median. 

The GMIAnalyst report I reviewed gave AAPL an overall D rating.

More than 10% of Apple shareholders voted against the re-election of three directors in 2013. Additionally, 40% of shareholders voted against the company’s “say on pay” vote in 2013. While this is not a majority, it represents a significant level of dissatisfaction from its shareholders…

Ideally the company would have established links between its incentive pay policies for company executives and the effective management of its social and environmental impacts, but this is not the case. Apple does not regularly publish a formal sustainability report. It does not currently report on its sustainability policies and practices via the Global Reporting Initiative…

We note that a collection of directors with long, coinciding tenure can sometimes form a subgroup in which collegiality takes precedence over rigorous oversight of a company’s affairs. In this case, for example, the compensation decisions approved by this board have met with significant dissent from shareholders at the most recent annual meeting. Related party transactions raise additional concerns in this regard…

The company has not disclosed specific, quantifiable performance target objectives for the CEO, in contrast to 73.9% of companies in its home market that have provided such metrics. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.

The company pays long-term incentives to executives without requiring the company to perform above the median of its peer group, which is the case for 98.4% of companies in the S&P 5000 index. Incentive plans that pay for mediocre performance undermine the linkage between pay and performance…

For these reasons, I was tempted to vote against the pay package and compensation committee but did not. I voted for all board recommended directors, item #2 majority voting for directors, #3 eliminate “blank check” authority of the board, #4 establishing par value of stock, #5 ratification of auditors, #6 pay package and #7 employee stock plan.

Shareholder Proposals

# 8. I voted in favor of the proposal by John Harrington & Northstar to establish a board committee on human rights. I see this as minimal cost, maximum good publicity. More importantly, it could put Apple in the forefront, instead of a foot dragger. For.

#9. I voted against the proposal by the National Center for Public Policy Research to produce a report on Apple’s membership in organizations that foster sustainability practices. The Center is well known for climate change denial, voter intimidation proposals and the right-wing American Legislative Exchange Council (ALEC). Against.

#10. I voted against Carl Icahn’s proposal for an additional $50B in share repurchases (buybacks). Read his withdrawal. Apple’s big pile of ‘cash’ will remain a huge target until deployed or explained. Generally, I view such proposals as “fishing with dynamite,” since they have a quick payoff but are often damaging to long-term health. Additionally, since NOE’s are frequently paid heavily with options, management is too frequently incentivized to line their own pockets at the expense of long-term shareowners.

From 2003 through 2012, 451 companies in the S&P 500 spent $2.4 trillion on buybacks, 54% of net income, and another $1.6 trillion on dividends, another 37% of net income. That left 9% to reinvest in the companies. What companies did some of the largest buybacks?

Between 1986 and 1996, Apple’s dividends totaled $457 million while stock buybacks totaled $1,761 million, nearly four times as much. Who were the prime beneficiaries? They were the company’s top executives, such as John Sculley and Michael Spindler, with their stock-based pay, running Apple into the ground.

From 1993-2000 Cisco did 71 acquisitions, 98% paid in shares. Then Cisco started buying back its stock and from 2002 through 2013 expended 107% of its net income on buybacks. They company has engaged in layoffs to sustain its buybacks and their equipment is quickly becoming commoditized.

Motorola tripled its profits to $4.6 billion in 2005, largely due to sales of its Razr cellphones. Then they started a program of buybacks and between 2005-2007 repurchased $7.7 billion, equal to 94% of its net income. In 2008, Motorola lost $4.2 billion and was finished as a serious competitor.

CalPERS argues they won’t be micromanaging companies. Buybacks can be good, if done for the right reasons. If they are dissatisfied with the direction of a company, CalPERS will focus on the directors (and, by implication, governance mechanisms such as majority voting for directors and proxy access). I can’t argue with that. Against.

#11. My proposal for proxy access. Don’t be fooled by Apple’s opposition statement, which says under my proposal 25 shareholders with $2,000 of stock each held for a year would be able to nominate a candidate. They left out a crucial fact. In total they would have to own 1% of Apple or about $4.8B in stock. The Board calls that a “low” threshold, yet even Carl Icahn hasn’t held nearly that much for nearly that long.

CalPERS, for example, holds about 0.31% of Apple. Under my proposal, they could potentially combine, for example, with Franklin Mutual Advisors (0.30%), CalSTRS (0.19%), Florida SBA (0.18%), and OPERS (0.09%) to nominate one board member. It wouldn’t be easy but if these huge funds, or others, put in the time to coordinate, vet a candidate and run them for office we would have a real competition of ideas.

I didn’t vote in favor of Icahn’s proposal for buybacks but I welcome his attention. Instead of focusing on how to extract more wealth, he and others should be running for the board and explaining how to enhance Apple’s wealth creation capabilities.

Wealth enhancement sure isn’t coming by investing through Apple’s Braeburn Capital subsidiary and earning 1-2% (extrapolated from last 10-K and annual report). If Apple invested its excess cash like Warren Buffett shareowners wouldn’t have a problem. Even if Apple announced a few large-scale funds such as Google Ventures and Google Capital we might have more confidence in the Board. My proposal to allow long-term investors holding 1% of Apple’s stock to place their nominees on the proxy will encourage debate. We see the qualifications of the incumbent board in the proxy but little about how they intend to add value. More at Proxy Access is Needed at Apple. For.

 How I Voted

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