EMC Corporation (EMC): Proxy Score 56

EMC Corporation (EMC), which develops, delivers, and supports information infrastructure and virtual infrastructure technologies, solutions, and services, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/30/2015. ProxyDemocracy.org had the vote of three funds (I added CalSTRS) when I checked and voted on 4/26/2015. I voted with management 56% of the time and assigned EMC a proxy score of 56.

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

EMC ISS Rating 

From Yahoo! Finance: EMC Corporation’s ISS Governance QuickScore as of Apr 1, 2015 is 6. The pillar scores are Audit: 1; Board: 3; Shareholder Rights: 2; Compensation: 9.  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.

EMC Compensation

EMC’s Summary Compensation Table (p. 77) shows the highest paid named executive officer (NEO) was CEO/Chair Joseph M. Tucci at  about $11.2M in 2014.  I’m using Yahoo! Finance to determine market cap ($54B) and Wikipedia’s rule of thumb regarding classification.

EMC 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 EMC’s pay is substantially more than that, even factoring for inflation. EMC shares underperformed the S&P 500 over the most recent six month, one, two, and five year periods. EMC outperformed very slightly over the most recent 10 year period.

The GMIAnalyst report I reviewed gave EMC an overall grade of ‘D.’ 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 annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.

Pay of $11M for mediocre performance, combined with the above issues, led me to vote against the pay package and stock plan.

EMC Board of Directors and Board Proposals

Generally, when I vote against the pay package I also vote against the compensation committee. I voted against: Randolph L. Cowen, Chair, William D. Green, and Paul Sagan. I voted against  John R. Egan because he is overboarded, siting on five boards, so cannot give adequate attention to each.

EMC Accounting

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

Shareholder Proposals at EMC

With regard to shareholder proposals. Of course I voted in favor of my own proposal for an independent chair, starting with the next CEO. The role of the Board of Directors is to provide independent oversight of management and the CEO. There is a potential conflict of interest for a CEO to be her/his own overseer as Chair while managing the business. I look forward to your ‘For’ vote on this important issue. EMC would have shareholders believe a Lead Director is equivalent to a Chairman. That simply is not the case.

CorpGov Recommendations for EMC – Votes Against Board Position in Bold

Corporate Governance Issues at EMC

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.

EMC Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals: 

To be eligible for inclusion in EMC’s Proxy Statement for the 2015 Annual Meeting of Shareholders, shareholder proposals submitted under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) must be received at EMC’s principal executive offices no later than November 21, 2015. Shareholder proposals should be addressed to: EMC Corporation, 176 South Street, Hopkinton, MA 01748, Attn:  Paul T. Dacier, Executive Vice President, General Counsel and Assistant Secretary, facsimile number: (508) 497‑8079.

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 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.