DaVita HealthCare Partners, DVA: Proxy Vote

DaVita HealthCare Partners $DVA, is one of the stocks in my portfolio. Their annual meeting is June 17, 2014. ProxyDemocracy.org had collected the votes of three funds when I checked and voted on 6/10/2014.  I voted with management 50% of the time.  View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the DVA proxy in order to enhance corporate governance and long-term value.  

Compensation

DVA’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Kent J. Thiry at about $17.1M in 2013. I’m using Yahoo! Finance to determine market cap ($15.4B) and Wikipedia’s rule of thumb regarding classification. DVA 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 DVA is well over that. DVA shares underperformed the NASDAQ over the most recent one year period, but outperformed in the two and five year periods. 

The GMIAnalyst report I reviewed gave DVA an overall grade of ‘C.’ According to the report:

• 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 total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.

Because pay was substantially above median and because of the problems noted by GMIAnalyst, I voted against the pay package. I voted against the stock plan, since it would dilute the value of our shares by more than 10%. I also voted against the members of the compensation committee: Pamela M. Arway, Chair, Paul J. Diaz, Peter T. Grauer and Roger J. Valine.

Board Issues

• 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.
• Multiple related party transactions and other potential conflicts of interest involving the company’s board or senior managers should be reviewed in greater depth, as such practices, even when limited to current market rates, raise concerns regarding potential self-dealing or abuse. We note that related party transactions are flagged at a majority (50.8%) of companies in United States.

Accounting

I’m concerned that more than 20% of fees paid to the auditor were for work other than the audit. That is approaching the level where it could become a conflict of interest. I voted to ratify the auditor.

Shareholder Proposals

There was only one shareowner proposal and it is mine, so of course I voted for it. I agree with the Council of Institutional Investors, whose members have over $3T invested and which maintains the following policy:

2.4   Independent Chair/Lead Director: The board should be chaired by an independent director. The CEO and chair roles should only be combined in very limited circumstances; in these situations, the board should provide a written statement in the proxy materials discussing why the combined role is in the best interests of shareowners, and it should name a lead independent director who should have approval over information flow to the board, meeting agendas and meeting schedules to ensure a structure that provides an appropriate balance between the powers of the CEO and those of the independent directors.

CorpGov Recommendations Below – Votes Against Board Position in Bold

Mark your Calendar

If you wish to present a proposal for action at the 2015 annual meeting of stockholders and wish to have it included in the proxy statement and form of proxy that management will prepare, you must notify us no later than January 6, 2015 in the form required under the rules and regulations promulgated by the SEC. Otherwise, your proposal will not be included in management’s proxy materials.

Issues for Future Proposals  

 Looking at SharkRepellent.net.

• No action can be taken without a meeting by written consent.

From Yahoo! Finance: DaVita HealthCare Partners Inc.’s ISS Governance QuickScore as of Jun 1, 2014 is 8. The pillar scores are Audit: 1; Board: 7; Shareholder Rights: 3; 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.