FB

Facebook (FB): Proxy Voting Recommendations

FBFacebook $FB, is one of the stocks in my portfolio. Their annual meeting is coming up on 5/22/2014. ProxyDemocracy.org had collected the votes of two funds when I checked and voted on 5/19/2014.  I voted with management 0% of the time.  View Proxy Statement. Read Warnings below.

Compensation

FB’s Summary Compensation Table (page 27) shows COO Sheryl K. Sandberg was the highest paid named executive officer (NEO) at about $16.2M in 2013. I’m using Yahoo! Finance to determine market cap ($151B) and Wikipedia’s rule of thumb regarding classification. FB is a large-cap company.  According to Equilar (page 6), the median CEO compensation at small-cap corporations was $9.7 million in 2012, so FB is paying  well over median. FB shares have outperformed the NASDQ over the one and two year periods.

According to GMI’s analysis,  

  • The Facebook, Inc. board does not include a fully independent compensation committee, raising concerns about the board’s effectiveness in overseeing the company’s CEO and other managers, a key board function, as well as its ability to design sufficiently rigorous incentives for executives.
  • 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.
  • 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.

Given the above, I would have voted against the pay package and members of the compensation committee (Donald E. Graham (Chair), Reed Hastings, Peter A. Thiel). However, I only got the opportunity to vote against the committee members.

GMIAnalyst

GMIAnalyst  

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

  • Securities Fraud

  • Related Party Transactions

  • Board Integrity

  • CEOs on Board

  • Severance Vesting

  • Controlling Shareholder Concerns

  • One Share One Vote

  • Expense Recognition

  • Other Social Impact Events

A few highlights from the report stood out:

When the board was criticized for a lack of diversity, its rather defiant response was to nominate Sheryl Sandberg to serve as director. Ms. Sandberg is the company’s COO, adding another insider to the board while adding no new expertise to the director slate. All told, Facebook’s board now consists of two inside directors, two large investors, and four more directors who either have substantial related party transactions with the company or nominated to the board by Mr. Zuckerberg himself. It’s hard to point to a single director who has the long-term interests of the company’s independent shareholders as their first priority.

Facebook’s dual-class ownership structure is at least as concerning as its board configuration. Mr. Zuckerberg controls about 65 percent of voting shares himself, with insiders and 5 percent holders at nearly 72 percent of vote control. Facebook’s ownership structure gives Mr. Zuckerberg ten votes per share on his Class B holdings while common stock holders have one vote per share. In effect, though the company is now public, Mr. Zuckerberg is ostensibly free to ignore the opinions of common stock shareholders and exert complete control over the company… Ownership structures such as these are uncommon in the United States market, with only 9.2% of the company’s flagged for having disparate voting rights. 

Moreover, while the board is currently elected as a single class, this will revert to a three tier classified election structure should the voting power of the controlling shareholder fall below 35%, effectively offsetting the implied benefits of an unclassified board structure. Director elections are also based on a plurality voting standard, further inhibiting the ability of minority public shareholders to influence the election of company directors. Facebook also lacks a standing committee dedicated to succession planning and the nomination of new director candidates.

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.

 Board of Directors

  • The board includes at least one executive director in addition to the CEO, characteristic of 32.7% of companies in this market. Multiple inside directors may provide a too-strong management voice within the boardroom. 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 46.1% of companies in the S&P 500.
  • he 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. Majority voting has become a widely prevalent practice in the S&P 500 index, with only 14.4% failing to adopt this standard. 
  • One or more of the board’s non-executive directors are active CEOs at another public corporation. While such individuals may well bring valuable experience to their board service, they may periodically experience difficulties in prioritizing their personal commitments, and in may also tend to side with the perspective of the company’s present management over the interests of its shareholders. 

Given all the various issues, including a general lack of shareowner rights, I voted against all board members.

Other Proxy Issues

I voted not to ratify the auditors. since almost half their fees where for other, possibly conflicting consultancy activities.

With regard to shareowner proposals, of course I voted for the proposal my wife and I (James McRitchie) submitted to adopt a recapitalization plan as soon as practicable for all outstanding stock to have one-vote per share. This is the most important proposal. First you get your rights; then you can use them. 

I also voted in favor of the proposal by the Benedictine Sisters of Mount St. Scholastica to report on lobbying expenses. This is critical if we are to know how our money is being spent and if it aligns with our values. 

I voted in favor of the proposal from NorthStar Asset Management to list political expenditures, as was assumed by the Citizens United decisions. Again, we need to know how our money is being spent and if it aligns with our values. 

I also voted with the Sisters of the Holy Names of Jesus and Mary to ask for a report on assessing whether the scope, scale and pace of implementation of the company’s advertising and privacy policies are sufficient to prevent material impacts on the company’s finances and operations due to public concerns about childhood obesity and public and private initiatives to eliminate or restrict food marketing to youth. I’d much rather have shareowner right and the ability to put people on the board who care about issues such as this. The list of issues could get quite long. However, until we do have such rights we must battle one issue at a time. 

Similarly, I voted for the proposal by Thomas P. DiNapoli, the Comptroller of the State of New York, to issue a report on sustainability issues.  

 

CorpGov Recommendations Below – Votes Against Board Position in Bold

#

PROPOSAL TEXT

CorpGov

CBIS

AFSCME

TRILLIUM

1.1

Elect Director Marc L. Andreessen

Withhold

Withhold

For

Withhold

1.2

Elect Director Erskine B. Bowles

Withhold

Withhold

For

Withhold

1.3

Elect Director Susan D. Desmond-Hellmann

Withhold

Withhold

For

Withhold

1.4

Elect Director Donald E. Graham

Withhold

Withhold

For

Withhold

1.5

Elect Director Reed Hastings

Withhold

Withhold

For

Withhold

1.6

Elect Director Sheryl K. Sandberg

Withhold

Withhold

Withhold

Withhold

1.7

Elect Director Peter A. Thiel

Withhold

Withhold

For

Withhold

1.8

Elect Director Mark Zuckerberg

Withhold

Withhold

Withhold

Withhold

2

Ratify Auditors

Against

Against

For

For

3

Approve Recapitalization Plan for all Stock to Have One-vote per Share

For

For

For

For

4

Report on Lobbying Payments and Policy

For

For

For

For

5

Screen Political Contributions for Consistency with Corporate Values

For

For

Against

For

6

Assess Privacy and Advertizing Policy Relating to Childhood Obesity

For

For

For

For

7

Report on Sustainability

For

For

For

For

Mark your Calendar

In order for a stockholder proposal or nomination for director to be considered for inclusion in our proxy statement and form of proxy relating to our annual meeting of stockholders to be held in 2015, the proposal or nomination must be received by us at our principal executive offices no later than December 1, 2014. Stockholders wishing to bring a proposal or nominate a director before the annual meeting to be held in 2015 (but not include it in our proxy materials) must provide written notice of such proposal to our Secretary at our principal executive offices between January 22, 2015 and February 21, 2015 and comply with the other provisions of our amended and restated bylaws.

Issues for Future Proposals

 Looking at SharkRepellent.net: 
  • Annually elected directors (default Delaware state statute). However, when the outstanding shares of Class B common stock represents less than 50% of the combined voting power of common stock, the board shall be classified with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • Action can be taken without a meeting by written consent. However, when the outstanding shares of Class B common stock represents less than 50% of the combined voting power of common stock, no action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Simple majority vote requirement to amend certain charter and all bylaws provisions. However, when the outstanding shares of Class B common stock represents less than 50% of the combined voting power of common stock, then supermajority vote (66.67%) of shareholders is required to amend certain charter and all bylaw provisions.
From Yahoo! FinanceFacebook, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 10. The pillar scores are Audit: 1; Board: 9; Shareholder Rights: 9; Compensation: 10.  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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