Microsoft

Microsoft Corporation (MSFT) – Proxy Score 62

MicrosoftMicrosoft Corporation ($MSFT), which develops, licenses, markets, and supports software, services, and devices worldwide, is one of the stocks in my portfolio. Their annual meeting is coming up on 12/3/2014. ProxyDemocracy.org had collected the votes of six funds when I checked and voted on 11/30/2014. Sorry for the late post. Tomorrow is the last day to vote online. I voted with management 62% of the time and assigned them a proxy score of 62.

View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Microsoft 2014 proxy in order to enhance corporate governance and long-term value.

Microsoft ISS Rating

From Yahoo! Finance: Microsoft Corporation’s ISS Governance QuickScore as of Nov 1, 2014 is 2. The pillar scores are Audit: 1; Board: 8; 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… the board.

Microsoft Compensation

Microsoft’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Satya Nadella, at about $84M.  I’m using Yahoo! Finance to determine market cap ($394B) and Wikipedia’s rule of thumb regarding classification.

Microsoft 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 Microsoft’s pay is well above that, even factoring for inflation. To its credit, Microsoft shares outperformed the NASDAQ over the most recent one and two periods, while falling considerably short over the most recent five and ten year periods.

GMIAnalyst

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

  • The company has not disclosed specific, quantifiable performance target objectives for the CEO. While a majority (83.9%) of companies in the home market have not disclosed these targets, disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
  • A significant portion (25 percent) of the award may vest even upon below-market TSR performance, at or below the 30th percentile of the S&P 500.

Like all six funds reported on ProxyDemocracy.orgI voted against the pay package. Unlike the reporting funds, I also voted against all members of the compensation committee, since they recommended and excessive amount, insufficiently related to performance. Committee members still running for the board included: Maria M. Klawe, Helmut Panke and John W. Stanton.

Microsoft Board of Directors

As indicated above, I voted against members of the compensation committee. I am delighted to see new additions to the board since submitting our proposal for proxy access in early June. That makes five new directors in less than a year. While that substantially reduces board entrenchment and other issues raised in our proposal, it doesn’t eliminate the need for long-time shareholders, with a substantial investment in Microsoft, to be able to place the names of nominees in our proxy.

Microsoft Accounting

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

Shareholder Proposals at Microsoft

There was only one shareowner proposal at Microsoft. It was our proposal to move to proxy access for directors. Being in the proxy isn’t the same as winning seats. If our proposal is enacted, any nominees will still need to get a majority of votes cast. In their rebuttal, Microsoft makes some minor points as to how the proposal could be improved. We would welcome such improvements.

Your vote simply asks the Board to amend our governing documents and while it does specify language, we have no problem with Microsoft adopting amendments that remain within the spirit of what we request.

The major idea here is that we want a real competition of ideas. Let’s allow groups of shareholders holding 3% of Microsoft’s stock (about $12B worth of stock)… let’s let them – if they have also held that stock for 3 years – to place their nominees on the proxy. Proxy access would drive competition among board candidates and would create direct accountability to shareholders.

CFA Institute, the group that certifies chartered financial analysts, recently issued a through report concluding that proxy access has the potential to enhance board performance and raise overall US market capitalization by up to $140.3 billion. Thank you Florida SBA for voting with us.

Microsoft stock had been underperforming the NASDAQ when this proposal was filed back in early June. We are delighted to see performance picking up. New members on the board have contributed to that progress. Proxy access would add to that momentum. Please vote in favor of proposal #4, proxy access.

CorpGov Recommendations for Microsoft – Votes Against Board Position in Bold

See votes by other funds at ProxyDemocracy

# PROPOSAL TEXT CorpGov CALVERT Florida SBA
1.1 Elect Director William H. Gates lll For For For
1.2 Elect Director Maria M. Klawe Withhold For For
1.3 Elect Director Teri L. List-Stoll For For For
1.4 Elect Director G. Mason Morfit For For For
1.5 Elect Director Satya Nadella For For For
1.6 Elect Director Charles H. Noski For For For
1.7 Elect Director Helmut Panke Withhold  For For
1.8 Elect Director Charles W. Scharf For For For
1.9 Elect Director John W. Stanton Withhold For For
1.10 Elect Director John W. Thompson For For For
  2 Advisory Vote to Ratify NEO Compensation Against Against Against
  3 Ratify Auditors For For For
  4 Proxy Access For Against For

Issues for the Future at Microsoft

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • No rights of proxy access
  • Unanimous written consent (default Washington state statute).

Mark your Calendar to Submit Future Proposals at Microsoft

Shareholders who, in accordance with SEC Rule 14a-8, wish to present proposals for inclusion in the proxy materials to be distributed in connection with next year’s annual meeting must submit their proposals so they are received by the Corporate Secretary of Microsoft at the address provided below no later than the close of business (5:30 p.m. Pacific Time) on June 18, 2015. As the rules of the SEC make clear, simply submitting a proposal does not guarantee that it will be included.

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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