Brocade Communications Systems, Inc. (BRCD), which provides storage area networking (SAN) and Internet protocol networking solutions, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/7/2015. ProxyDemocracy.org had the votes of two funds when I checked and voted on 4/2/2015. I voted with management 43% of the time and assigned Brocade Communications a proxy score of 43. Publishers note: Elizabeth Chang, my administrative assistant, will be posting several of my votes for upcoming meetings.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Brocade Communications 2015 proxy in order to enhance corporate governance and long-term value.
Brocade Communications ISS Rating
From Yahoo! Finance: Brocade Communications Systems, Inc.’s ISS Governance QuickScore as of Mar 1, 2015 is 1. The pillar scores are Audit: 1; Board: 2; Shareholder Rights: 1; 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… compensation.
Brocade Communications Compensation
Brocade Communications Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Lloyd A. Carney, at about $10.1M in 2014. I’m using Yahoo! Finance to determine market cap ($5B) and Wikipedia’s rule of thumb regarding classification.
Brocade Communications is a large-cap company. According to Equilar (page 6), the median CEO compensation at mid-cap corporations was $4.9 million in 2013, so Brocade Communications’ pay is well above that. Brocade Communications shares outperformed the NASDAQ over the most recent two and ten periods, losing over the most recent one and five year periods. Therefore, it is hard to give the CEO credit for outperformance.
The GMIAnalyst report I reviewed gave Brocade Communications an overall grade of ‘C.’ According to the report:
- 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.
- The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.
With the high relative pay and the above issues, I voted against the pay package.
Brocade Communications Board of Directors and Board Proposals
Generally, when I vote against the pay package I also vote against the compensation committee, since they recommended the pay package to the full board. Therefore, I voted against Messrs. DiPentima, House, Krause and Vaswani. Additionally, the board failed to enact a proposal from Kenneth Steiner to allow shareholders with 10% of shares to call a special meeting, even 60% of shares voted in favor. Therefore, I voted against all member of the nominating and governance committee, since they were responsible for recommending action on the proposal to the full board. All members of the nominating and governance committee also serve on the compensation committee, so I had double reasons for voting against the same directors.
I voted against both omnibus stock plans because one is too dilutive of our stock and the other would reward directors for performance that needs improvement.
Brocade Communications Accounting
I voted to ratify Brocade Communications auditor, KPMG, since far less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Brocade Communications
With regard to shareholder proposals, I voted in favor Kenneth Steiner’s clawback proposal. Compensation policies should promote sustainable value creation, not failure.
CorpGov Recommendations for Brocade Communications – Votes Against Board Position in Bold
|1.1||Elect Director Judy Bruner||For||For||For|
|1.2||Elect Director Lloyd A. Carney||For||For||For|
|1.3||Elect Director Renato A. DiPentima||Against||Against||Against|
|1.4||Elect Director Alan L. Earhart||For||For||For|
|1.5||Elect Director John W. Gerdelman||For||For||For|
|1.6||Elect Director Dave House||Against||Against||Against|
|1.7||Elect Director L. William (Bill) Krause||Against||Against||Against|
|1.8||Elect Director David E. Roberson||For||For||For|
|1.9||Elect Director Sanjay Vaswani||Against||Against||Against|
|2||Ratify Named Executive Officers’ Compensation||Against||Against||For|
|3||Amend Omnibus Stock Plan||Against||Against||For|
|4||Amend Non-Employee Director Omnibus Stock Plan||Against||For||For|
|5||Ratify KPMG LLP as Auditors||For||For||Against|
|6||Claw-back of Payments under Restatements||For||For||For|
Governance Issues at Brocade Communications
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Special meetings can only be called by shareholders holding not less than 25% of the voting power.
Mark your Calendar to Submit Future Proposals at Brocade Communications
In order for a stockholder proposal to be included in our proxy statement and form of proxy relating to our 2016 Annual Meeting of Stockholders, under rules set forth in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the proposal must be received by us no later than October 28, 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.
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