The Coca-Cola Co (KO), which primarly manufactures and distributes various nonalcoholic beverages, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/29/2015. ProxyDemocracy.org had the vote of three funds when I checked and voted on 4/22/2015 (they now have more). I voted with management 58% of the time and assigned Coca-Cola a proxy score of 58.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Coca-Cola 2015 proxy in order to enhance corporate governance and long-term value.
Coca-Cola ISS Rating
From Yahoo! Finance: The Coca-Cola Company’s ISS Governance QuickScore as of Apr 1, 2015 is 5. The pillar scores are Audit: 2; Board: 7; Shareholder Rights: 2; Compensation: 7. 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… board and compensation.
Coca-Cola Compensation
Coca-Cola’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Muhtar Kent at about $18M in 2014. I’m using Yahoo! Finance to determine market cap ($180B) and Wikipedia’s rule of thumb regarding classification.
The Coca-Cola 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 Coca-Cola’s pay is substantially more than that, even factoring for inflation. Coca-Cola shares underperformed the S&P 500 over the most recent six month, one, two, and five year periods. Coca-Cola outperformed very slightly over the most recent 10 year period.
The GMIAnalyst report I reviewed gave Coca-Cola an overall grade of ‘F.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination. 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 company pays long-term incentives to executives without requiring the company to perform above the median of its peer group. Incentive plans that pay for mediocre performance undermine the linkage between pay and performance.
- 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 directors may weaken the ability of equity awards to align directors’ interests with long-term value creation.
Pay of $18M for mediocre performance combined with the above issues doesn’t seem right. I voted against the pay package.
Coca-Cola Board of Directors and Board Proposals
Generally, when I vote against the pay package I also vote against the compensation committee. I voted against: Maria Elena Lagomasino, Chair, Ronald W. Allen, Helene D. Gayle, and Alexis M. Herman. I’m also concerned that too many directors have served more than twelve years on the board. I question their continued independence. I voted against Barry Diller for being overboarded. Four boards is too many, especially when this one is underperforming. I also voted against Muhtar Kent who should not hold both CEO and Chair positions.
Coca-Cola Accounting
I voted to ratify Coca-Cola’s auditor, Ernst & Young LLP, since far less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Coca-Cola
With regard to shareholder proposals, of course I voted in favor of John C. Harrington’s proxy access proposal. Contrary to the board’s opposition statement, there is general agreement among most shareholders on the proper terms for proxy access and Harrington’s proposal contains all the standard provisions.
Unfortunately, I had to vote against Elton Shepherd’s proposal to require a shareholder vote for the release of any unvested restricted stock awards and unvested PSU awards to Senior Executives and Board members. While I agree with his main thrust that such awards are not free and have been over utilized, his proposal is too all-inclusive.
CorpGov Recommendations for Coca-Cola – My Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | TRILLIUM | CALVERT | FloridaSBA | DOMINI |
|---|---|---|---|---|---|---|
| 1.1 | Herbert A. Allen | For | Against | For | For | For |
| 1.2 | Ronald W. Allen | Against | Against | For | Against | For |
| 1.3 | Marc Bolland | For | Against | For | For | For |
| 1.4 | Ana Botin | For | Against | For | For | For |
| 1.5 | Howard G. Buffet | For | Against | For | For | For |
| 1.6 | Richard M. Daley | For | Against | For | For | For |
| 1.7 | Barry Diller | Against | Against | For | For | For |
| 1.8 | Helene D. Gayle | Against | Against | For | Against | For |
| 1.9 | Evan G. Greenberg | For | Against | For | For | For |
| 1.10 | Alexis M. Herman | Against | Against | For | Against | For |
| 1.11 | Muhtar Kent | Against | Against | For | For | Against |
| 1.12 | Robert A. Kotick | For | Against | For | For | For |
| 1.13 | Maria Elena Lagomasino | Against | Against | For | Against | For |
| 1.14 | Sam Nunn | For | Against | For | For | For |
| 1.15 | David B. Weinberg | For | Against | For | For | For |
| 2 | Ratify Executive Pay | Against | Against | Against | Against | Against |
| 3 | Ratify Auditor Ernst & Young LLP | For | For | For | For | For |
| 4 | Proxy Access | For | For | For | For | For |
| 5 | Shareholder Approval of Unvested Restricted Stock PSU Awards | Against | Against | Against | Against | Against |
Corporate Governance Issues at Coca-Cola
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.
Coca-Cola Proxy Proposal Deadline for Next Year
I congratulate Coca-Cola for facilitating the ability of shareholders to send proxy proposals via e-mail. Mark your Calendar to Submit Future Proposals:
If the proposal is to be included in the proxy statement, pursuant to Rule 14a-8 under the 1934 Act, the proposal is received at the Office of the Secretary on or before November 13, 2015. In addition, the shareowner proponent, or a representative who is qualified under state law, must appear in person at the 2016 Annual Meeting of Shareowners to present such proposal.
Proposals should be sent to the Office of the Secretary (1) by mail to the Office of the Secretary, The Coca-Cola Company, P.O. Box 1734, Atlanta, Georgia 30301, (2) by e-mail toshareownerservices@coca-cola.com or (3) by fax to (404) 676-8409.
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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