DigitalGlobe (DGI) Proxy Voting Recommendations

DGIDigitalGlobe $DGI is one of the stocks in my portfolio. Their annual meeting is coming up on 5/28/2014. ProxyDemocracy.org had collected the votes of no funds when I checked and voted on 5/19/2014.  I voted with management 80% of the time.  View Proxy Statement. Read Warnings below.  What follows are my proxy voting recommendations for DGI.

Compensation

DGI’s Summary Compensation Table shows CEO Jeffrey R. Tarr was the highest paid named executive officer (NEO) at about $3.5M in 2013. I’m using Yahoo! Finance to determine market cap ($2.4B) and Wikipedia’s rule of thumb regarding classification. DGI is a small-cap company, although at the upper end.  According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.5 million in 2012, so DGI is paying well over median. DGI shares outperformed the S&P 500 over the two and five year periods but underperformed last year. I’m concerned that DGI has not established a formal clawback policy regarding its executive incentive pay. According to GMIAnalyst:

  • The CEO’s potential cash severance pay exceeds five times his or her annual pay, which occurs in only 17.6% of companies in the home market. Such excessive ‘golden parachute’ payments weaken the pay for performance linkage and enable pay for failure.
  • Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 90.2% of companies in the home market. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
  • 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 90.7% of companies in the Russell 3000 index. Incentive plans that pay for mediocre performance undermine the linkage between pay and performance.

Given the above, I voted against the pay package and would have voted against members of the compensation committee (Warren C. Jenson, Chairman, Lawrence A. Hough, and James M. Whitehurst), if given a chance. However, I didn’t get the opportunity to vote against any of the committee members because of DGI’s classified board.

GMIAnalystGMIAnalyst   The GMIAnalyst report I reviewed gave DGI an overall grade of ‘C.’ From their report the following were listed as potential areas of concern:  

  •  Related Party Transactions

  • Golden Parachutes

  • Severance Vesting

  • Revenue Recognition

  • Expense Recognition

  • Asset-Liability Valuation

A few highlights from the report stood out:

  • The company has been flagged for its failure to establish specific environmental impact reduction targets, a critical practice for any company operating in a high environmental impact industry that is committed to its own long-term sustainability. The company has been flagged for its failure to utilize an environmental management system or to seek ISO 14001 certification for some or all of its operations.
  • DigitalGlobe does not regularly publish a formal sustainability report. It does not currently report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor has it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. In the area of workplace safety this company has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle.

 Board of Directors.

  • The board is elected in separate classes with terms that expire in different years rather having all directors subject to annual reelection. While often touted as a means of ensuring board continuity, a classified board structure severely limits the ability of shareholders to hold directors accountable and serves as a takeover defense. In addition, the company has charter and bylaw provisions that would make it difficult or impossible for shareholders to achieve control by enlarging the board or removing directors and filling the resulting vacancies. This combination is widely associated with inferior board performance and 24.7% of U.S. companies are flagged for this. The combined effect of these mechanisms is to reduce board accountability to shareholders.

Other Proxy Issues I voted to ratify the auditors.

CorpGov Recommendations Below – Votes Against Board Position in Bold
NUM. PROPOSAL TEXT CorpGov CALVERT CBIS
1a Elect Director Howell M. Estes III For Against Against
1b Elect Director Kimberly Till For Against Against
1c Elect Director Eddy Zervigon For Against Against
2 Ratify NEO Compensation Against Against Against
3 Ratify Auditors For For Against

Mark your Calendar

If you are submitting a proposal to be included in next year’s Proxy Statement, you may do so by following the procedures prescribed in Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Stockholder proposals submitted for inclusion in next year’s Proxy Statement must be received by our Corporate Secretary at our executive offices no later than December 15, 2014. In the event that we elect to hold our 2015 annual meeting of stockholders more than 30 days before or after May 28, 2015, such stockholder proposals must be received by us within a reasonable time before we begin to print and send our proxy materials for the 2015 annual meeting of stockholders.

Issues for Future Proposals

 Looking at SharkRepellent.net: 
  • Classified board with staggered terms.
  • Directors may only be removed for cause and only by the vote of 80% of the shares entitled to vote.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (80%) to amend certain charter and all bylaw provisions.
From Yahoo! FinanceDigitalGlobe, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 6. The pillar scores are Audit: 10; Board: 2; Shareholder Rights: 7; Compensation: 7.  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.

Warnings

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.

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