GHDX

Genomic Health $GHDX Proxy Recommendations

GHDXGenomic Health (GHDX), is one of the stocks in my portfolio. Their annual meeting is coming up on June 6, 2014. ProxyDemocracy.org had collected the votes of one fund when I checked and voted on 5/27/2014.  I voted with management 92% of the time.  View Proxy Statement. (Note: GHDX proxy Table of Contents is only for stock incentive plan… not the proxy. Very poorly done.) Read Warnings below. What follows are my recommendations on how to vote the GHDX proxy in order to enhance corporate governance and long-term value. 

Compensation

GHDX’s Summary Compensation Table (page 19) shows CEO/Chair Kimberly J. Popovits was the highest paid named executive officer (NEO) at about $2.1M in 2013. I’m using Yahoo! Finance to determine market cap ($849M) and Wikipedia’s rule of thumb regarding classification. GHDX is a small-cap company.  According to Equilar (page 6), the median CEO compensation at mid-cap corporations was $2.5 million in 2012, so GHDX is within median. GHDX shares have performed worse than the NASDAQ over the one, two and five year periods.

The GMIAnalyst report I reviewed gave WCN an overall grade of ‘D.’ From their report the following were listed as potential areas of concern with regard to pay:  

  • 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.
  • 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.
  • The CEO’s annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.
  • 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 all those issues, I voted for the pay package, hoping the company will institute reforms.

 Board of Directors

  • 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.
  • 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. Majority voting has been widely adopted in the United States, especially among larger-cap companies, but more than 61.9% of the Russell 3000 remains under a plurality or plurality plus voting standard. There are 8 directors in all and the board met 10 times in the last reported year.
  • At least five of the eight directors have served for ten years of longer, raising concern they may no longer be independent.

Other Proxy Issues

I voted against the stock plan as dilutive. I voted to ratify the bonus plan and the auditor.

CorpGov Recommendations Below – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov CBIS
1.1 Elect Director Kimberly J. Popovits For Withhold
1.2 Elect Director Felix J. Baker For Withhold
1.3 Elect Director Julian C. Baker For Withhold
1.4 Elect Director Fred E. Cohen For Withhold
1.5 Elect Director Samuel D. Colella For Withhold
1.6 Elect Director Henry J. Fuchs For Withhold
1.7 Elect Director Ginger L. Graham For Withhold
1.8 Elect Director Randall S. Livingston For Withhold
2 Amend Omnibus Stock Plan Against Against
3 Approve Executive Incentive Bonus Plan For For
4 Ratify NEO Compensation For For
5 Ratify Auditors For Against

Mark your Calendar

If a stockholder wishes to present a proposal to be considered for inclusion in our proxy statement for the 2015 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC. One of the requirements is that the proposal be received by Genomic Health’s Secretary no later than December 27, 2014. Proposals we receive after that date will not be included in the proxy statement. We urge stockholders to submit proposals by Certified Mail—Return Receipt Requested.

Issues for Future Proposals

Looking at SharkRepellent.net: 

  • Plurality vote standard to elect directors with no resignation policy.
  • Board is authorized to increase or decrease the size of the board without shareholder approval.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.

From Yahoo! FinanceGenomic Health Inc.’s ISS Governance QuickScore as of May 1, 2014 is 6. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 4; 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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