International Business Machines (IBM): Proxy Score 50

IBM (International Business Machines Corp.), which provides information technology (IT) products and services worldwide, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/28/2015. ProxyDemocracy.org had the vote of four funds when I checked and voted on 4/21/2015. I voted with management 50% of the time and assigned IBM a proxy score of 50.

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

IBM ISS Rating

From Yahoo! Finance: International Business Machines Corporation’s ISS Governance QuickScore as of Apr 1, 2015 is 4. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 3; 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… compensation. 

IBM Compensation

IBM’s Summary Compensation Table (p. 40) shows the highest paid named executive officer (NEO) was CEO and Chairman V. M. Roometty, at  about $19.3M in 2014.  I’m using Yahoo! Finance to determine market cap ($162B) and Wikipedia’s rule of thumb regarding classification.

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

The GMIAnalyst report I reviewed gave IBM 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, which is the case for 87.1% of companies in the S&P 500 index. 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.
• 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.
• A decline has occurred in the CEO’s equity holdings in the company over last year. Diminished executive exposure to company stock may work to reduce the alignment between the CEO’s interests and those of shareholders.
• The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO may weaken the ability of equity awards to align executives’ interests with long-term value creation.

Pay of  $19M for continued underperformance combined with the above issues seem unreasonable. I voted against the pay package.

IBM Board of Directors and Board Proposals

Generally, when I vote against the pay package I also vote against the compensation committee, since they recommend the pay package to the full board. Therefore, I voted against: Sidney Taurel (chair), Alex Gorsky, Andrew N. Liveris, and W. James McNerney, Jr..

I am also concerned that five board members have served for 10 years or more and none have served for less than 3. Two board members serve on 4 boards, which I consider overboarded. I voted against Shirley Ann Jackson. Although she is well qualified, serving on five boards is too many, especially given the turnaround that is still needed at IBM.  I would like to see more board refreshment.

IBM Accounting

I voted to ratify IBM’s auditor, PricewaterhouseCoopers LLP, since far less than 25 percent of total audit fees paid are attributable to non-audit work. However, I am concerned that they have been IBM’s independent auditor since at least 1993. The longevity of the relationship may point to problems such objectivity or capture.

Shareholder Proposals at IBM

With regard to shareholder proposals. I voted for all of them, since they were all of the type I would submit myself. These are all standard good governance proposals and deserve widespread support, including the proposal requesting establishment of a board level committee on Public Policy.

CorpGov Recommendations for IBM – Votes Against Board Position in Bold

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• Unanimous written consent (default New York state statute).
• Special meetings can only be called by shareholders holding not less than 25% of the voting power.

IBM Proxy Proposal Deadline for Next Year

Mark your Calendar to Submit Future Proposals: 

Stockholder proposals may be submitted for IBM’s 2016 proxy material after the 2015 Annual Meeting and must be received at our corporate headquarters no later than November 10, 2015. Proposals should be sent via registered, certified or express mail to: Office of the Secretary, International Business Machines Corporation, 1 New Orchard Road, Mail Drop 301, Armonk, NY 10504.

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.