Annies $BNNY

Annies (BNNY): Proxy Score 66

Annies $BNNYAnnies Inc $BNNY, which produces, markets, and distributes natural and fantastic organic food productsis one of the stocks in my portfolio. I bought into the company not only because of their products but also because Annies has more women executives and directors than most. I am hoping that helps them connect with their customers. Unfortunately, they apparently have no minorities on their board. Annies’ next annual meeting is September 9, 2014. ProxyDemocracy.org had collected the votes of two funds when I checked and voted on 8/27/2014, plus I also found how CalSTRS voted. I voted with the Board’s recommendations 66% of the time and assigned them a proxy score of 66. View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Annies proxy in order to enhance corporate governance and long-term value.

Annie’s ISS Rating

From Yahoo! Finance: Annies, Inc.’s  ISS Governance QuickScore as of Aug 1, 2014 is 2. The pillar scores are Audit: 5; Board: 3; Shareholder Rights: 4; Compensation: 1. 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. That gives us a quick idea of where to focus.

Annie’s Compensation

Annie’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CFO Zahir M. Ibrahim, at about $0.8M.  I’m using Yahoo! Finance to determine market cap ($503M) and Wikipedia’s rule of thumb regarding classification. Annie’s is a small-cap company. According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.7 million in 2013, so Annie’s pay is well below that. However, Annie’s shares underperformed the NASDAQ over the most recent one, two and five year periods, so it is likely that more attention from the Board is needed. GMIAnalyst

The GMIAnalyst report I reviewed gave Annies 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’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.

Because pay was lower than median and the two concerns raised by GMIAnalyst are common to most companies, I voted in favor of the compensation package

Annies Board 

In looking at the ESG summary analysis at GMIAnalyst, I saw only two concerns:

  • The Annie’s board currently has an independent majority, which enables it to more effectively fulfill its critical function of overseeing management on behalf of shareholders. 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. We also note that the board Chairman is an Insider or Executive Chairman. This practice raises parallel concerns as does the combination of CEO and Chair roles: a potential for overly powerful management interests and board level conflicts of interest.
  • 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 7 directors in all and the board met 11 times in the last reported year.

However, in reviewing individual members of the Board, I see the following own no shares in Annies: Bettina M. Whyte, John M. Foraker CEO, Julie D. Klapstein, Molly F. Ashby COB, and Robert W. Black but Black has served for less than a year. Going to the beneficial ownership page of the proxy, I was able to confirm that Bettina M. Whyte and John M. Foraker have rights to acquire stock (which I assume were granted by the company) but they do not own any actual shares in our company. Julie D. Klapstein and Molly F. Ashby apparently own neither shares or rights to acquire them.

That just does not make sense to me. If directors do not think Annies is worth investing in, why should we? Frankly, I am flabbergasted. I once went on a board going through bankruptcy. That would be a good reason for not owning stock but if Annies has reasonably good prospects, all directors should be owners. See How Much Skin Should Directors Have in the Game? 

If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second.

Does Skin in the Game Matter? in looking at mutual funds found

ownership stakes in the funds they oversee are related to the subsequent performance of the funds: funds with low director ownership perform poorly. This underperformance has sizeable statistical significance and is economically large.

I checked with CalSTRS on this issue. While they agree directors should have ownership, they do not have a policy to withhold votes from Directors that do not hold shares.

I voted against Bettina M. Whyte, John M. Foraker, Julie D. Klapstein, and Molly F. Ashby. Frankly, I’m not too happy with Billie I. Williamson either, with only 300 shares but 300 is better than none.

Annies Accounting

I voted to ratify the Annies auditor, KPMG, since they didn’t appear to do an substantial work for Annies other than the audit.

Shareholder Proposals

None this year.

CorpGov Recommendations Below – Votes Against Board Position in Bold

Proposal                                          CBIS Trillium CalSTRS CorpGov
1.1 Elect Molly F. Ashby                        Withhold Withhold For Withhold
1.3 Elect Robert W. Black                      Withhold Withhold For For
1.5 Elect Lawrence S. Peiros                  Withhold Withhold For For
1.7 Elect Billie Ida Williamson                Withhold Withhold Withhold For
3 Say on Pay                                     For Against For For

Issues for Future Proposals at Annies 

shark_logoLooking at SharkRepellent.net for provisions unfriendly to shareowners:

  • Plurality vote standard to elect directors with no resignation policy.
  • Directors may only be removed for cause and only by the vote of 66.67% of the shares entitled to vote.
  • 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.

Mark your Calendar to Submit Future Proposals at Annies

No information provided in the proxy.  

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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