Walt Disney

The Walt Disney Company (DIS): Proxy Score 79

DisneyThe Walt Disney Company $DIS, which operates as a worldwide entertainment company, is one of the stocks in my portfolio. Their annual meeting is coming up on 3/12/2014. ProxyDemocracy.org had the votes of four funds when I checked and voted on 3/8/2015.  I voted with management 79% of the time and assigned them a proxy score of 79.

View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Walt Disney 2015 proxy in order to enhance corporate governance and long-term value.

Walt Disney ISS Rating

From Yahoo! Finance: The Walt Disney Company’s ISS Governance QuickScore as of Feb 1, 2015 is 4. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 7; Compensation: 4. 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… shareholder rights.

Walt Disney Compensation 

Walt Disney Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chairman Robert A. Iger, at about $46.5M.  I’m using Yahoo! Finance to determine market cap ($178.5B) and Wikipedia’s rule of thumb regarding classification.

The Walt Disney Company 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 Walt Disney’s pay is well above that. To its credit, Walt Disney shares outperformed the S&P 500 over the most recent one, two, five and ten periods.

GMIAnalyst

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

  • Unvested equity awards partially or fully accelerate upon the CEO’s termination, allowing 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. Such metrics are essential for investors to assess the rigor of incentive programs.
  • The company pays long-term incentives to executives without requiring performance above the median of its peer group. Paying for mediocre performance undermines the incentive to perform at a high level.
  • 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.

I voted against the pay package.

Walt Disney Board of Directors and Board Proposals

Although I am concerned with the growing proportion of the board serving for over a decade, I voted in favor of all of them. Other than the say-on-pay proposal and the auditor, there were no other board proposals.

Walt Disney Accounting

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

Shareholder Proposals at Walt Disney

With regard to shareholder proposals, I voted in favor Independent Board Chairman, to move to an independent board chair when Mr. Iger 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 William Steiner’s proposal to Limit Accelerated Executive Pay. Vesting such awards on a pro rata basis up to the time of termination would help ensure pay is based on performance.

CorpGov Recommendations for Walt Disney – Votes Against Board Position in Bold

# PROPOSAL CorpGov CBIS TRILLIUM CALVERT  DOMINI
1a Susan E. Arnold For For For For For
1b John S. Chen For For For For For
1c Jack Dorsey For For For For For
1d Robert A. Iger For For For For Against
1e Fred H. Langhammer For For For For For
1f Aylwin B. Lewis For For For For Against
1g Monica C. Lozano For For For For For
1h Robert W. Matschullat For For For For For
1i Sheryl K. Sandberg For For For For For
1j Orin C. Smith For For For For For
2 Ratify Auditor For Against For For For
3 Ratify NEO Pay Against For Against Against Against
4 Indep Board Chairman For For For For For
5 Pro-rata Vesting of Equity Awards For For For For For

SharkRepellentGovernance Issues at Walt Disney

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, instead of 10%.
  • Supermajority vote requirement (66.67%) to amend certain charter provisions, instead of 50+%.

Mark your Calendar to Submit Future Proposals at Walt Disney

Shareholder Proposals for Inclusion in 2016 Proxy Statement. To be eligible for inclusion in the proxy statement for our 2016 Annual Meeting, shareholder proposals must be received by the Company’s Secretary no later than the close of business on September 18, 2015. Proposals should be sent to the Secretary, The Walt Disney Company, 500 South Buena Vista Street, Burbank, California 91521-1030 and follow the procedures required by SEC Rule 14a-8.

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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