Starbucks Corporation $SBUX, which operates as a roaster, marketer, and retailer of specialty coffee worldwide, is one of the stocks in my portfolio. Their annual meeting is coming up on 3/18/2014. ProxyDemocracy.org had the votes of four funds (now more) when I checked and voted on 3/8/2015. I voted with management 81% of the time and assigned Starbucks a proxy score of 81.
Starbucks ISS Rating
From Yahoo! Finance: Starbucks Corporation’s ISS Governance QuickScore as of Mar 1, 2015 is 1. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 1; 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.
Starbucks Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chairman Howard Schultz, at about $21.5M. I’m using Yahoo! Finance to determine market cap ($69B) and Wikipedia’s rule of thumb regarding classification.
Starbucks 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 Starbuck’s pay is well above that. To its credit, Starbucks shares outperformed the S&P 500 over the most recent one, two, five and ten periods.
The GMIAnalyst report I reviewed gave Starbucks an overall grade of ‘D.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination. Such accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
- The company has not disclosed specific, quantifiable performance target objectives for the CEO. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
- The CEO’s total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
With all those issues, I voted against the pay package.
Starbucks Board of Directors and Board Proposals
I’m concerned that the board has a high number of long-serving directors (8 of 12 have served 10 years or longer). While I recognize the benefits of experience, it becomes increasingly challenging to act independently with such extensive service. Long-tenured directors can often form relationships that may compromise their independence and therefore hinder their ability to provide effective oversight. Despite my reservations, I voted for all directors.
I voted to ratify Starbucks’s auditor, Deloitte & Touche, since far less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Starbucks
With regard to shareholder proposals, I voted in favor Independent Board Chairman, to move to an independent board chair when Mr. Schultz vacates that position, submitted by James McRitchie, publisher of CorpGov.net, for the following reasons:
- The primary duty of a board is to monitor management on behalf of shareholders. A CEO who also serves as chair can exert a dominant influence on the board and its agenda, weakening oversight.
- A 2012 report by GMIRatings, The Costs of a Combined Chair/CEO, found that companies with a separate CEO and chair provide investors with five-year shareholder returns that are nearly 28% higher than those helmed by a party of one. The study also found that corporations with combined CEO and chair roles are 86% more likely to register as “Aggressive” in GMI’s Accounting and Governance Risk (AGR®) model.
- The Council of Institutional Investors, whose members invest over $3 trillion, clearly favors an independent chair in the following policy: “The board should be chaired by an independent director.”
- Evolution of the role of the board has created an array of significant duties, difficult to reconcile with the time required to manage the demands of a large company. According to a survey by the National Association of Corporate Directors, 72.8% of directors serving on boards with an independent chair opined that companies greatly benefit, while 6.7% stated they did not.
- According to a Spencer Stewart survey of board members (page 21), 64% agree or strongly agree that splitting the positions results in more independent thought by directors, while 60% affirm that it leads to more effective CEO evaluations.
- A ‘lead’ or ‘presiding’ director does not have the same status as a board chair, either internally or externally.
I also voted in favor of John Harrington’s proposal to establish a Board Committee on Sustainability. That seems like a really good fit for Starbucks, given its reputation. A dedicated board committee would help put Starbucks in even more of a leadership position.
CorpGov Recommendations for Starbucks – Votes Against Board Position in Bold
|1b||William W. Bradley||For||Against||For||For|
|1c||Robert M. Gates||For||For||For||For|
|1e||Kevin R. Johnson||For||Against||For||For|
|1g||Joshua Cooper Ramo||For||For||For||For|
|1h||James G. Shennan, Jr.||For||Against||For||For|
|1j||Javier G. Teruel||For||For||For||For|
|1k||Myron E. Ullman, III||For||Against||For||Against|
|1l||Craig E. Weatherup||For||Against||For||For|
|2||Ratify NEO Compensation||Against||For||For||Against|
|4||Establish Board Committee on Sustainability||For||For||Against||For|
|5||Require Independent Board Chairman||For||For||For||For|
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Unanimous written consent (default Washington state statute).
- Supermajority vote requirement (66.67%) to approve mergers (default Washington state statute).
Mark your Calendar to Submit Future Proposals at Walt Disney
Pursuant to SEC Rule 14a-8, shareholder proposals intended for inclusion in our 2016 proxy statement and acted upon at our 2016 Annual Meeting of Shareholders (the “2016 Annual Meeting”) must be received by us at our executive offices at 2401 Utah Avenue South, Mail Stop S-LA1, Seattle, Washington 98134, Attention: Corporate Secretary, on or prior to September 25, 2015.
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.