Ellie Mae (ELLI): Proxy Voting Recommendations

ELLIEllie Mae (ELLI), is one of the stocks in my portfolio. Their annual meeting is coming up on 5/21/2014. ProxyDemocracy.org had collected the votes of no funds when I checked and voted on 5/15/2014.  I voted with management 50% of the time.  View Proxy Statement. Read Warnings below. My proxy voting recommendations for ELLI follow.


ELLI’s Summary Compensation Table (page 39) shows CEO/Chair Sigmund Anderman was the highest paid named executive officer (NEO) at about $2.4M in 2013. I’m using Yahoo! Finance to determine market cap ($708M) and Wikipedia’s rule of thumb regarding classification. Elli is a small-cap company.  According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.5 million in 2012, so ELLI is slightly below median. ELLI shares have outperformed the S&P 500 over the two and five year periods but not over the latest one year period. 

I’m concerned the board has not established a formal clawback policy regarding its executive incentive pay. Such policies allow boards to recoup incentive payouts that may have been the undeserved result of erroneous or fraudulent financial reporting. Additionally, 

  • 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’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.

Despite these reservations, I voted in favor of the pay package but am unlikely to do so in future if no reforms are taken in this area.


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

  • Related Party Transactions
  • Entrenched Board
  • Severance Vesting
  • Asset-Liability Valuation
  • Social Impact Events

A few highlights from the report stood out: 

The company has failed to split the roles of CEO and chairman, which may compromise even further the board’s independence from current management interests. Split CEO and chairman roles are characteristic of 57.8% of companies in the Russell 3000.

Multiple related party transactions and other potential conflicts of interest involving the company’s board or senior managers should be reviewed in greater depth, as such practices, even when limited to current market rates, raise concerns regarding potential self-dealing or abuse. We note that related party transactions are flagged at a majority (50.8%) of companies in United States.

GMI has flagged the board as potentially entrenched due to a high number of long-serving directors. Of particular importance during periods of extended underperformance, the impact of an entrenched board can be particularly damaging to sustainable shareholder interests. We have also flagged this board for potential concerns regarding the integrity and effectiveness of certain directors…

These concerns are aggravated due to additional factors, e.g. , a classified board, entrenching takeover defenses, which together with the high number of long-tenured directors raises concerns about whether the board is able to provide an effective counterbalance to management. We note that only 21.9% in United States have been flagged for having an entrenched board.

 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.

The company has not adopted a full majority director election standard, greatly limiting the ability of company shareholders to hold members of the board accountable in uncontested elections.

The company has failed to split the roles of CEO and chairman, which may compromise even further the board’s independence from current management interests. Split CEO and chairman roles are characteristic of 57.8% of companies in the Russell 3000.

Additionally, over half the board has served for ten years or more and that three directors hold no shares in our company despite serving from three to thirteen years. Given these facts and all the above, I voted against all directors. This board needs changes in order to be accountable to shareowners.

Other Proxy Issues

I voted to ratify the auditor and to reduce supermajority requirements. I’m very pleased our company put this measure on the proxy and recommended a vote in favor. However, it is highly unlikely they would have done so without the proposal my wife and I submitted to them requesting similar action. Boards do react to shareowner initiatives.

CorpGov Recommendations Below – Votes Against Board Position in Bold
1.1Elect Director Craig DavisWithholdWithhold
1.2Elect Director Robert J. LevinWithholdWithhold
1.3Elect Director Jeb S. SpencerWithholdWithhold
2Ratify AuditorsForFor
3Advisory Vote to Ratify NEO CompensationForAgainst
4Reduce Supermajority Vote RequirementForFor

Mark Your Calendar

To be considered for inclusion in our proxy materials for next year’s annual meeting, your proposal must be submitted in writing by December 12, 2014, to our Secretary at 4155 Hopyard Road, Suite 200, Pleasanton, California 94588; provided that if the date of the annual meeting is earlier than April 21, 2015 or later than June 20, 2015, the deadline is a reasonable time before we begin to print and send our proxy materials for next year’s annual meeting.

Issues for Future Proposals

 Looking at SharkRepellent.net: 
  • Classified board with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • Directors may only be removed for cause.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
From Yahoo! FinanceEllie Mae, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 7. The pillar scores are Audit: 1; Board: 8; 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.


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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