HD

The Home Depot (HD): Proxy Voting Recommendations

HDThe Home Depot (HD), 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 no funds when I checked and voted on 5/15/2014.  I voted with management 47% of the time.  View Proxy Statement. Read Warnings below.

Compensation

HD’s Summary Compensation Table shows CEO/Chair Francis S. Blake was the highest paid named executive officer (NEO) at about $11M in 2013. I’m using Yahoo! Finance to determine market cap ($105B) and Wikipedia’s rule of thumb regarding classification. WCN is a large-cap company.  According to Equilar (page 6), the median CEO compensation at large-cap corporations was $9.7 million in 2012, so HD is above median. While HD shares have out-performed the S&P 500 over the latest two and five year periods, it underperformed this last year. The GMIAnalyst report I reviewed raised several pay concerns:

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

Weighing the above factors, I reluctantly voted against the pay package and against compensation committee members: 

  • Gregory D. Brenneman, Chair
  • Albert P. Carey
  • Armando Codina
  • Helena B. Foulkes
  • Bonnie G. Hill (not standing for election because she reached mandatory retirement age)

GMIAnalyst

The GMIAnalyst report I reviewed gave HD an overall grade of ‘D.’ From their report the following highlights stood out:

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.

 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 46.1% of companies in the S&P 500.
  • 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.
  • Director overboarding may be a problem for this board, with at least one non-executive director sitting on too many boards. GMI considers a non-executive director to be overboarded when they sit on more than four public boards.

Since she sits on four boards, which is too many to do an excellent job when times are tough, I voted against Ms. Katen,

Other Proxy Issues

I voted to confirm the auditor. With regard to shareowner proposals, of course I voted for the one I my wife and I submitted (James McRitchie) to allow those holding 15% of shares to call a special meeting. This right is generally supported by Vanguard and the Council of Institutional Investors. Additionally, I supported the proposal by the Benedictine Sisters of Boerne, Texas to generate a report on diversity at HD. My hope is that further investigation by HD will lead to a more productive workforce as well as a reduction in future discrimination lawsuits

CorpGov Recommendations Below – Votes Against Board Position in Bold
# PROPOSAL TEXT CorpGov DOMINI CALVERT  CBIS
1a Elect Director F. Duane Ackerman For For For For
1b Elect Director Francis S. Blake For Against For For
1c Elect Director Ari Bousbib For For For For
1d Elect Director Gregory D. Brenneman Against For For For
1e Elect Director J. Frank Brown For For For For
1f Elect Director Albert P. Carey Against For For For
1g Elect Director Armando Codina Against For For For
1h Elect Director Helena B. Foulkes Against For For For
1i Elect Director Wayne M. Hewett For For For For
1j Elect Director Karen L. Katen Against For For For
1k Elect Director Mark Vadon For For For For
2 Ratify Auditors For For For Against
3 Ratify NEO Compensation Against Against For For
4 Reduce Requirement to Call Special Meeting For For For For
5 Prepare Employment Diversity Report For For For For

Mark your Calendar 

To be considered for inclusion in next year’s Proxy Statement and form of proxy, proposals by shareholders for business to be considered at the 2015 Annual Meeting of Shareholders must be submitted in writing by December 8, 2014 and must comply with the requirements of SEC Rule 14a-8. Proposals should be submitted to: Corporate Secretary, The Home Depot, Inc., 2455 Paces Ferry Road, N.W., Building C-22, Atlanta, Georgia 30339.

shark_logoIssues for Future Proposals

Looking at SharkRepellent.net: 
  • Special meetings can only be called by shareholders holding not less than 25% of the voting power. Maybe we will take care of that one this year. 
From Yahoo! FinanceThe Home Depot, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 1. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 1; Compensation: 4. 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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