Cisco Systems

Cisco Systems – Proxy Vote Score 37

Cisco SystemsCisco Systems, Inc. (NASD:CSCO), which designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide, is one of the stocks in my portfolio. Their annual meeting is coming up on 11/20/2014. ProxyDemocracy.org had collected the votes of four funds when I checked on 11/18/2014. Sorry for the late post. Today is the last day to vote online. I voted with management 37% of the time and assigned them a proxy score of 37.  View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Cisco Systems 2014 proxy in order to enhance corporate governance and long-term value.

Cisco Systems ISS Rating

From Yahoo! Finance: Cisco Systems, Inc.’s ISS Governance QuickScore as of Nov 1, 2014 is 1. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 1; Compensation: 3. 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.

Cisco Systems Compensation

Cisco Systems Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO and Chairman John T. Chambers, at about $16.5M.  I’m using Yahoo! Finance to determine market cap ($136B) and Wikipedia’s rule of thumb regarding classification. Cisco Systems is a large-cap company.  According to Equilar (page 6), the median CEO compensation at large-cap corporations was $10.1 million in 2013, so Cisco Systems’ pay is above that, even factoring for inflation. Cisco Systems shares underperformed the NASDAQ over the most recent two, five and ten year periods, sometimes substantially.

GMIAnalyst

The GMIAnalyst report I reviewed gave Cisco Systems an overall grade of ‘D.’ According to the report:

  •  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.

I voted against the pay package and the members of the compensation committee: Roderick C. McGeary, Chair, Carol A. Bartz, M. Michele Burns and Brian L. Halla

Cisco Systems Board of Directors

As indicated above, I voted against members of the compensation committee. I am also concerned that more half the board members have served 11 years or more and that Arun Sarin is overboarded with 4 directorships. Given those concerns I voted against Sarin and the two senior members of the Corporate Governance and Nominating Committee, Bartz and Johnson.

Other Cisco Systems Management Proposals

I voted in favor of the employee stock purchase plan. It is important to align and incentivize employees in the same direction as stockholders. The shares reserved are relatively conservative; and the offer period is within prescribed limits.

Cisco Systems Accounting

I voted to ratify Cisco Systems’ auditor, PricewaterhouseCoopers LLP, since less than 25 percent of total audit fees paid are attributable to non-audit work.  

Shareholder Proposals at Cisco Systems

Establish Public Policy Board Committee. This would give Cisco a board committee with specific responsibility for oversight of public policy issues and could assist the board in its oversight of a number of public issues that may affect operations, performance, reputation, and shareholder value. Such a board committee would be inexpensive insurance.

Adopt Proxy Access Right. Of course, I voted in favor of my own proposal. Giving the right of nomination to separate non coordinating groups reduces the likelihood it will be used by special interest groups to form a control group. We are looking for a coalition government. Keep in mind that, although proxy access has been passed at several companies, it has yet to be used. Even when used, directors nominated by shareholders must win a majority vote.

From 18th November PIRC Alerts:

The proponent requests that the Board amend the Company’s By- Laws to grant shareholders a right to nominate board candidates as a fundamental principle of good corporate governance and board accountability. The amendment would enable shareholders to nominate director candidates subject to limitations, including owning 3% of the issued share capital for a minimum of three years.

Currently the board is considered to be 20% independent with the entire audit committee and the majority of the remuneration and nomination committees not considered independent.

The board believes that the proposal is unnecessary because Cisco’s governance structure provides shareholders meaningful opportunity regarding the nomination and election of directors.

The proponent raises legitimate governance concerns about board independence.

PIRC recommends a For Vote

Report on Political Contributions. I always vote in favor of reasonably crafted proposals to encourage disclosure of company payments to trade associations and board level oversight of its political contributions and trade association memberships. How can shareholders hold management and the board accountable for its political activities and expenditures, as suggested by Justice Kennedy in Citizens United, unless we know what they are?

CorpGov Recommendations for Cisco Systems Below – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov DOMINI CALVERT  CBIS TRILLIUM
1a Elect Director Carol A. Bartz Against For For For For
1b Elect Director M. Michele Burns Against For For For For
1c Elect Director Michael D. Capellas For For For For For
1d Elect Director John T. Chambers For Against For For For
1e Elect Director Brian L. Halla Against For For For For
1f Elect Director John L. Hennessy For For For For For
1g Elect Director Kristina M. Johnson Against For For For For
1h Elect Director Roderick C. McGeary Against For For For For
1i Elect Director Arun Sarin Against For For For For
1j Elect Director Steven M. West For For For For For
2 Amend Qualified Employee Stock Purchase Plan For For For For For
3 Ratify NEO Compensation Against Against For For Against
4 Ratify Auditors For For For Against For
5 Establish Public Policy Board Committee For For For For For
6 Adopt Proxy Access Right For Against Against Against Against
7 Report on Political Contributions For For For For For

Issues for Future Cisco Systems 

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

  • No right of proxy access

Mark your Calendar to Submit Future Proposals at Cisco Systems

Shareholders of Cisco may submit proposals on matters appropriate for shareholder action at meetings of Cisco’s shareholders in accordance with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in Cisco’s proxy materials relating to its 2015 Annual Meeting of Shareholders, all applicable requirements of Rule 14a-8 must be satisfied and such proposals must be received by Cisco no later than June 2, 2015. Such proposals should be delivered to Cisco Systems, Inc., Attn: Secretary, 170 West Tasman Drive, San Jose, California 95134-1706 (and we encourage you to send a copy via email to [email protected]), with a copy to Cisco Systems, Inc., Attn: General Counsel at the same address.

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 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.

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