Costco Wholesale: Proxy Score 36

CostcoCostco Wholesale Corporation (COST), which operates membership warehouses, is one of the stocks in my portfolio. Their annual meeting is coming up on 1/29/2015. ProxyDemocracy.org lists the votes of 6 funds from 5 fund families. You can also find votes from CalSTRS and OTPP.  I voted with management 36% of the time and assigned them a proxy score of 36.

View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Costco proxy in order to enhance corporate governance and long-term value. I thank the Costco board for their action in furtherance of my proposal last year to move from supermajority to simple majority standards. That proposal won 65% of the shares voted. 

I apologize to readers. I am too busy to provide my normal analysis but I will provide the rationale for my proposal on director tenure. I must say, I am disappointed that several of the funds listed at ProxyDemocracy.org have voted against my proposal to require that 67% of the board to have less than 15 years of tenure.. I find it strange that while they are voting against my proposal aimed at board refreshment, they are also voting against the board members that are up for reelection… perhaps because the board failed to act on a proxy proposal that passed to declassify the board, which the directors have apparently ignored.  It doesn’t make any sense to vote against a very mild requirement for board refreshment and also vote against all the directors. I would love to have funds explain their logic to me.

What follows is my presentation to the meeting and my voting recommendations.

Speaking in support of Proposal #6:

Reduce Director Entrenchment at Costco

We are delighted with Costco’s overall long-term performance and believe the current board has done an outstanding job. While we recognize the benefits of experience, we also know that it becomes increasingly difficult to act independently after serving for fifteen years.

Eight out of 14 Costco directors have tenure of 15 years or more.

We are concerned Costco’s board may not have adequately addressed the need for succession planning and refreshment. Many directors at other companies find it difficult to let go of fellow board members because of the close personal relationships they have built up over the years.

Ours is an innovative proposal, asking that 67% of the board have less than 15 years of tenure. While shareholders at other companies seek hard ceilings based on age or tenure, our proposal aims to give the board more flexibility in meeting the goal of ensuring board refreshment.

Costco’s opposition statement indicates the Nominating and Governing Committee has been actively engaged in a search for director candidates. That’s wonderful.

We share their specified objectives of ensuring the skill mix needed to match Costco’s evolving business, reducing the number of directors who are not “independent,” enhancing diversity, and bringing individuals who add new perspectives. We also embrace the stated expectation of making such nominations prior to the annual meeting in 2016.

Voting for our proposal to Reduce Director Entrenchment will help ensure Board not only meets its goals for the 2016 annual meeting but also ensures board refreshment far into the future.

Please vote in favor of proposal #6, Reduce Director Entrenchment.

CorpGov Recommendations for United Natural Foods – Votes Against Board Position in Bold

Proposal AFSCME CorpGov.net CalSTRS
1.1 Elect Jeffrey H. Brotman Withhold Withhold Withhold
1.3 Elect Richard A. Galanti Withhold Withhold Withhold
1.5 Elect James D. Sinegal Withhold Withhold Withhold
3 Advisory Vote on Executive Compensation For For For
5 Elimination of Supermajority Requirement for the Removal of Directors For For For
7 Share Holder Proposal Shareholder Proposal Regarding Director Tenure For For Against

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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