Illumina $ILMN 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 one fund when I checked and voted on 5/20/2014. I voted with management 86% of the time. View Proxy Statement. Read Warnings below. What follows are my proxy voting recommendations for ILMN.
Compensation
ILMN’s Summary Compensation Table shows CEO Jay T. Flatley was the highest paid named executive officer (NEO) at about $2.3M in 2013. I’m using Yahoo! Finance to determine market cap ($19B) and Wikipedia’s rule of thumb regarding classification. ILMN is a large-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $19.7 million in 2012, so ILMN is paying well under median, although it is a smallish large-cap. ILMN shares outperformed the S&P 500 by a considerable margin over the one, two and five year periods.
I’m concerned that ILMN has not established a formal clawback policy regarding its executive incentive pay. According to GMIAnalyst:
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 may weaken the ability of equity awards to align executives’ interests with long-term value creation.
Although reforms are needed, I voted in favor of the pay package.
GMIAnalyst
The GMIAnalyst report I reviewed gave ILMN an overall grade of ‘D.’ From their report the following were listed as potential areas of concern:
- Related Party Transactions
- Board Integrity
- Overboarded Directors
- Golden Hellos
- Severance Vesting
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.
- Illumina 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.
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.
- 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 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.
I voted against Daniel M. Bradbury who sits on five boards. That’s too many to devote enough time to each, especially if one or more goes into a crisis.
Other Proxy Issues
I voted to ratify the auditors. I voted against an exclusive forum for disputes as too restrictive on shareowner rights.
| # | PROPOSAL TEXT | CorpGov | CBIS |
| 1.1 | Elect Director Daniel M. Bradbury | Against | For |
| 1.2 | Elect Director Robert S. Epstein | For | For |
| 1.3 | Elect Director Roy A. Whitfield | For | For |
| 1.4 | Elect Director Francis A. deSouza | For | For |
| 2 | Ratify Auditors | For | For |
| 3 | Ratify NEO Compensation | For | For |
| 4 | Adopt Exclusive Forum | For | Against |
Mark your Calendar
Stockholder proposals that are intended to be presented at our 2015 annual meeting of stockholders must be received at our principal executive offices no later than December 9, 2014, in order to be included in the proxy statement and form of proxy relating to that meeting, and must meet all other requirements as specified in our bylaws and Rule 14a-8 under the Securities Exchange Act of 1934.
Issues for Future Proposals
Looking at SharkRepellent.net: - Classified board with staggered terms.
- Directors may only be removed for cause (default Delaware state statute for companies with a classified board).
- 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 certain bylaw provisions.
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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