Procter & Gamble Company (PG), which manufactures and sells branded consumer packaged goods, is one of the stocks in my portfolio. Their annual meeting is coming up on 10/14/2014. ProxyDemocracy.org had collected the votes of three funds when I checked on 9/20/2014. I voted with management 44% of the time and assigned them a proxy score of 44. View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Proctor & Gamble 2014 proxy in order to enhance corporate governance and long-term value.
Procter & Gamble ISS Rating
From Yahoo! Finance: The Procter & Gamble Company’s ISS Governance QuickScore as of Oct 1, 2014 is 2. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 2; 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. That gives us a quick idea of where to focus.
Procter & Gamble Compensation
Procter and Gamble Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO and Chairman A.G. Lafley, at about $19.5M. I’m using Yahoo! Finance to determine market cap ($227B) and Wikipedia’s rule of thumb regarding classification. Procter & Gamble is a mega-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $10.1 million in 2013, so Procter & Gamble’s pay is well above that. I’m not going to give that much credit for being a mega-cap. Procter & Gamble’s shares underperformed the S&P 500 over the most recent one, two and five year periods, sometimes substantially. For example, while the S&P 500 went up about 83% in the last five years, Procter & Gamble went up only 46%.
The GMIAnalyst report I reviewed gave Procter & Gamble an overall grade of ‘C.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 80.8% of companies in the home market. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
Given the high pay and poor performance, I voted against the stock plan, pay package and the members of the compensation committee: W. James McNerney, Kenneth I. Chenault Jr., Scott D. Cook, Margaret C. Whitman, and Mary Agnes Wilderotter.
Procter & Gamble Board of Directors
As indicated above, I voted against members of the compensation committee. I am also concerned that more than 60% of the board is over 60 years old and the same percentage serves on three boards. Ideally, I’d like to see that a bit lower.
Procter & Gamble Accounting
I voted to ratify Procter & Gamble’s auditor, Deloitte & Touche LLP, since less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Procter & Gamble
As you Sow, representing the Roddenberry Foundation, submitted a proposal to requesting that the board of directors issue a report at reasonable cost, omitting confidential information, assessing the environmental impacts of continuing to use unrecyclable brand packaging. The board opposes the measure in light of their “extensive efforts to ensure responsible and sustainable packaging.” Sure, they are moving. Let’s move faster.
NorthStar Asset Management submitted a proposal requesting “that the Board of Directors report to shareholders annually at reasonable expense, excluding confidential information, a congruency analysis between corporate values as defined by P&G’s stated policies (including our Purpose, Values and Principles, nondiscrimination policy, and Long-Term Environmental Sustainability Vision) arid Company and P&G GGF political and electioneering contributions, including a list of any such contributions occurring during the prior year which raise an issue of misalignment with corporate values, and stating the justification for such exceptions.” Although Procter & Gamble’s disclosure regarding its political contribution policies, initiatives, and oversight may be slightly more robust than most, NorthStar’s request is very reasonable.”
Writing for the court in the 5-4 decision in Citizens United, Judge Kennedy opined:
With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.
Of course, disclosure is the critical element Kennedy assumed but which is missing. Companies are not required under current law to report or account for their soft money political donations or their payments to trade associations and other tax-exempt organizations, such as “social welfare” 501(c)(4) groups, that are actually used for political purposes. If Procter & Gamble is really doing such a great job, a congruency analysis should be a snap. How do we know if Procter & Gamble is making contributions in our interest if they don’t disclose. This would be a small step in the right direction.
CorpGov Recommendations for Procter & Gamble Below – Votes Against Board Position in Bold
|1a||Elect Director Angela F. Braly||For||For||For|
|1b||Elect Director Kenneth I. Chenault||Against||Against||For|
|1c||Elect Director Scott D. Cook||Against||For||For|
|1d||Elect Director Susan Desmond-Hellmann||For||For||For|
|1e||Elect Director A.G. Lafley||For||Against||For|
|1f||Elect Director Terry J. Lundgren||For||Against||For|
|1g||Elect Director W. James McNerney, Jr.||Against||Against||For|
|1h||Elect Director Margaret C. Whitman||Against||Against||For|
|1i||Elect Director Mary Agnes Wilderotter||Against||Against||For|
|1j||Elect Director Patricia A. Woertz||For||Against||For|
|1k||Elect Director Ernesto Zedillo||For||For||For|
|3||Approve Omnibus Stock Plan||Against||Against||For|
|4||Advisory Vote to Ratify Named Executive Officers’ Compensation||Against||Against||For|
|5||Assess Environmental Impact of Non-Recyclable Packaging||For||For||For|
|6||Report on Consistency Between Corporate Values and Political Contributions||For||For||For|
Issues for Future Proposals at Procter & Gamble
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Unanimous written consent (default Ohio state statute).
- Special meetings can only be called by shareholders holding not less than 25% of the voting power (default Ohio state statute).
- Supermajority vote requirement (80%) to approve mergers not approved by the board with a stockholder holding 5% or more of the common shares.
Mark your Calendar to Submit Future Proposals at FedEx
It is anticipated that the 2015 annual meeting of shareholders will be held on Tuesday, October 13, 2015. Pursuant to regulations issued by the SEC, to be considered for inclusion in the Company’s proxy statement for presentation at that meeting, all shareholder proposals must be received by the Company on or before the close of business on May 1, 2015. Any such proposals should be sent to The Procter & Gamble Company, c/o Secretary, One Procter & Gamble Plaza, Cincinnati, OH 45202-3315.
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 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 % if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.