Reed's

Reed’s, Inc. (REED) – Proxy Score 43

Reed'sReed’s, Inc. (REED), which develops, manufactures, markets, and sells natural non-alcoholic carbonated soft drinks, kombucha, candies, and ice creams, is one of the stocks in my portfolio. Their annual meeting is coming up on 12/12/2014. Reed’s is still too small to be covered by ProxyDemocracy.org.  I voted with management 43% of the time and assigned them a proxy score of 43.

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

Reed’s ISS Rating

Yahoo! Finance had no ISS Governance QuickScore for Reed’s.

Reed’s Compensation

Reed’s Summary Compensation Table (page 21) shows the highest paid named executive officer (NEO) was CEO Christopher J. Reed, at about $251,000.  I’m using Yahoo! Finance to determine market cap ($82M) and Wikipedia’s rule of thumb regarding classification.

Reed’s is a micro-cap company.  According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.7 million in 2013, so Reed’s pay is well below that. Reed’s shares outperformed the NASDAQ over the most recent five year period, while falling considerably short over the most recent one, two and ten year periods.

GMIAnalyst

Reed’s Board of Directors

According to GMIAnalyst (June report), Reed’s, Inc. is currently rated as having Average Accounting & Governance Risk (AGR). This places them in the 70th percentile among all companies in North America, indicating higher accounting and governance risk than 30% of companies. That should improve if Reed’s can get its SEC filings in on time and if there is no unexpected officer turnover.

As per last year, I recommend voting against Mr. Muffoletto and Mr. Fischman. Without at least some investment in our company, they have little incentive to be diligent board members. According to page 22 of the proxy, Mr. Muffoletto received less than $12,000 last year for his service, primarily for chairing the audit committee. Mr. Fischman received only $900 for his service as a board member.

It is no wonder that, according to the proxy (page 14), Michael Fischman attended less than 75% of the aggregate board meetings and committee meetings held, as was the case last year. Preparing for and attending 9 board meetings is a lot to ask for $900, and that doesn’t count committee meetings. With nothing invested in Reeds and so little pay, can anyone really expect these two directors to spend much effort reviewing and advising management? Without the vote of insiders last year, both directors would have been voted out of office last year.

Mr. Harris has 509 shares, according to the proxy, down from more than 9,000 last year.  Why did he sell?  Does he know something we don’t?  He received $1,500 for his board service. An investment of $3,500 and pay of $1,500 certainly wouldn’t provide much motivation to me. Serving on the Reed’s board should not be considered public service.

I don’t buy into the argument that owning shares is a conflict of interest for directors, as I was told by one of the directors last year. I want directors who feel the same pain I do when the stock goes down and the same joy when it goes up. All three outside directors have so little invested in our company that I can’t imagine them being anything more than a rubber stamp board. While the Reeds may be brilliant, independent boards serve a real purpose and should have much to offer. I voted against all three outside directors and recommend other shareowners do the same.

Reed’s Accounting

I voted to ratify the auditor.

Shareholder Proposals at Reed’s

The only shareholder proposal at Reed’s is my own proposal to specified long-term holder proxy access, so that we can nominate up to two board members and place their names on the proxy.

Last year I introduced a proxy access proposal calling on the Board to allow 1% shareowners holding for two years to place their director nominees (up to 24% of the board) on the proxy. It also would have allowed a party of 25 or more $2,000 one-year shareowners to place an equal number of nominees on the proxy. Since Reeds had a five-member board, the proposal would have allowed for up to two shareowner nominees from two non-coordinating parties.

Reeds hired a law firm to build the case for a “no-action” letter from the SEC based on late submittal but it was on time and the SEC denied the request. In their Preliminary Proxy Statement, Reeds argued that under my proposal a special interest group could elect a board member who has no holdings of Reed’s stock at all.” (my emphasis) Then they may have looked at their board and realized two of their current directors didn’t hold any stock either, so they dropped that argument when they issued their definitive proxy.

They also argued the stakes required were too low, so I raised the holding requirements substantially. This year’s version calls on the Board to allow 3% shareowners holding for at least three years to place their director nominees (up to 20% of the board) on the proxy. It would also allow a party of 25 or more $2,000 two-year shareowners collectively holding at least 2% of the company to place an equal number of nominees on the proxy.  With the current board configuration, that would mean both qualifying groups could nominate one board member each. Since our top three institutional investors don’t even own 3% of Reed’s, it would take the combination of The Vanguard Group, Inc., North Star Investment Management Corp., Tygh Capital Management, Inc., and Reynders, McVeigh Capital Management LLC to nominate just one board member.

Again, the Reed’s board argues passage of the proposal “could result in the election of ‘special interest directors.'” Again, that is nonsense. No “special interest group” could elect a board member, since it takes a majority of shares voted to win election.  Any shareowner nominee would have to win more votes than a candidate nominated by the board and two members of the board control about 1/3 of the vote. If shareholder nominees did win, that means more than 70% of non-insiders support the candidates, assuming insiders voted for the board nominated candidates. Could shareholder nominees really be considered as representing a “special interest group” under such circumstances? The Board’s statement implies that all but inside shareowners are “special interests.” I think it is more like the other way around. The insiders are the actual ‘special interest’ group.

Are you satisfied with our company’s performance? Reed’s shares underperformed the NASDAQ over the most recent one, two and ten year periods. Reed’s has great products and great potential. We need a great board to help us realize that potential. Please vote for proxy access.

CorpGov Recommendations for Reed’s – Votes Against Board Position in Bold

NUM. PROPOSAL TEXT Management CorpGov
1.1 Christopher J. Reed For For
1.2 Judy Holloway Reed For For
1.3 Mark Harris For Withhold
1.4 Daniel S.J. Muffoletto For Withhold
1.5 Michael Fischman For Withhold
2 Ratify Auditor For For
3 Proxy Access Proposal Against For

Mark your Calendar to Submit Future Proposals at Reed’s

Stockholder proposals for inclusion in our proxy statement: If a stockholder wishes to present a proposal to be included in our proxy statement and form of proxy for the 2014 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC and namely, Securities Exchange Act Rule 14a-8. One of the requirements is that the proposal be received by our Secretary no later than July 15, 2015, which is 120 calendar days before November 12, 2015 – the anniversary date of this Proxy Statement was released to stockholders in connection with the 2014 Annual Meeting. If the date of next year’s annual meeting is changed by more than 30 days from the anniversary date of this year’s Annual Meeting on December 12, 2014, then the deadline is a reasonable time before we begin to print and mail proxy materials. Proposals we receive after that date will not be included in the proxy statement for the 2015 Annual Meeting of Stockholders.

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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