SZYM

Solazyme (SZYM): Proxy Voting Recommendations

SZYMSolazyme $SZYM, 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 % of the time.  View Proxy Statement. I sure would have liked a Table of Contents with links to facilitate my review. Read Warnings below. 

Compensation

SZYM’s Summary Compensation Table (page 29) shows CEO Jonathan S. Wolfson was the highest paid named executive officer (NEO) at about $3.5M in 2013. I’m using Yahoo! Finance to determine market cap ($642M) and Wikipedia’s rule of thumb regarding classification. SZYM 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 SZYM is paying over median. SZYM shares have underperformed the NASDQ by substantial margins over the one, two and five year periods.

I’m concerned that SZYM has not established a formal clawback policy regarding its executive incentive pay. According to GMI’s analysis,

  • 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 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.

Given the above, I would have voted against the pay package. Additionally, I would have voted against members of the compensation committee (Michael V. Arbige (Chair), Ian T. Clark and James R. Craigie). However, I didn’t get the opportunity to do either.

GMIAnalystGMIAnalyst  

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

  • Related Party Transactions
  • Overboarded Directors
  • Severance Vesting
  • Revenue Recognition

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. 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.

Solazyme 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. In the area of workplace safety this company has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle.

 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 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.
  • 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.

Ann Mather serves on five boards. GMI considers a non-executive director to be overboarded when they sit on more than four public boards. I share that opinion and would have voted against her, if given the opportunity. Unfortunately, I was not. However, given all the various issues, including a general lack of shareowner rights, and the opportunity to vote against two directors, I did so. It was the only way to really send a message to the board.

Other Proxy Issues

I voted to ratify the auditors.

CorpGov Recommendations Below – Votes Against Board Position in Bold
# PROPOSAL TEXT CorpGov CBIS
1.1 Elect Director Jonathan S. Wolfson Withhold Withhold
1.2 Elect Director David C. Cole Withhold Withhold
2 Ratify Auditors For Against

Mark your Calendar

Stockholder proposals to be considered for inclusion in the proxy statement and form of proxy relating to the 2015 annual meeting of stockholders must be received no later than December 10, 2014. In addition, all proposals will need to comply with Rule 14a-8 under the Exchange Act, which lists the requirements for the inclusion of stockholder proposals in company-sponsored proxy materials.

Stockholder proposals must be delivered to the attention of our Corporate Secretary, at Solazyme, Inc., 225 Gateway Boulevard, South San Francisco, California 94080, by facsimile at (650) 989-1258 or by email at [email protected].

Issues for Future Proposals

 Looking at SharkRepellent.net: 
  • Classified board with staggered terms.
  • 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.
  • Directors may only be removed for cause.
  • 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! FinanceSolazyme, Inc.’s ISS Governance QuickScore as of May 1, 2014 is 9. The pillar scores are Audit: 1; Board: 9; Shareholder Rights: 8; 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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