Johnson & Johnson

Johnson & Johnson (JNJ): Proxy Score 44

Johnson & JohnsonJohnson & Johnson (JNJ), which researches, develops, manufactures, and sells various products in the health care field worldwide, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/23/2015. ProxyDemocracy.org had the vote of three funds when I checked and voted on 4/17/2015.  I voted with management 44% of the time and assigned Johnson & Johnson a proxy score of 44.

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

Johnson & Johnson ISS Rating

From Yahoo! Finance: Johnson & Johnson’s ISS Governance QuickScore as of Apr 1, 2015 is 1. The pillar scores are Audit: 2; Board: 2; Shareholder Rights: 4; Compensation: 1. 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. 

Johnson & Johnson Compensation

Johnson & Johnson’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO and Chairman Alex Gorsky, at  about $25M in 2014.  I’m using Yahoo! Finance to determine market cap ($280B) and Wikipedia’s rule of thumb regarding classification.

Johnson & Johnson 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 Johnson & Johnson’s pay is considerably above that, even factoring for inflation. Johnson & Johnson shares underperformed in comparison to the NYSE over the most recent one, two, five, and ten year periods. Therefore, it is hard to give the CEO credit for above average performance when total shareholder returns have been below average in every period examined.

GMIAnalyst

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

  •  The company has not disclosed specific, quantifiable performance target objectives for the CEO.
  • The company pays long-term incentives to executives without requiring the company to perform above the median of its peer group.
  • 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.

With high relative pay, poor performance and the above issues, I voted against the pay package.

Johnson & Johnson 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 William D. PerezCharles PrinceA. Eugene Washington, and Ronald A. Williams.

I also voted against Anne M. Mulcahy and Ronald A. Williams (again). I consider them overboarded, since they sit on four boards each. I would prefer the chairman and CEO roles be split so that each can devote full-time or nearly so to these important positions. Instead, at Johnson & Johnson we have those roles combined and must rely more heavily on our lead director, Anne Mulcahy, whose attention is split between four boards.

Johnson & Johnson Accounting

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

Shareholder Proposals at Johnson & Johnson

With regard to shareholder proposals, I voted in favor of all of them.

  • My wife, Myra K. Young, seeks a “Common Sense Policy regarding Overextended Directors.” Instead of placing a hard limit on the number of boards a director can serve on, the proposal requests a policy that directors serving on more than three boards be prohibited (with some exception) from being the lead director or chairing a committee at Johnson & Johnson. Our company’s current policy limits directors to no more than five directorships. We think that is too many, especially at a company that has been underperforming the NYSE over the most recent one, two, five, and ten year periods. The Board argues the proposal would “directly interfere” with its ability to fulfill their fiduciary duties. What about their duty to shareholders? Those duties would be more easily met if directors cared enough to not divide their time and loyalties between so many boards.
  • The proposal from NorthStar Asset Management seeks “Alignment between Corporate Values and Political Contributions.” Our company argues the proposal would “require significant resources that could otherwise be spent on business needs.” I believe the costs would be minor in comparison to earnings of the company or CEO and potential losses to our company’s brand, reputation, and shareholder value as a result of misalignment.
  • Kenneth Steiner’s proposal seeks to split CEO and chair positions with the next incumbent. The Board recognizes the need for a “strong counterbalancing structure” and argues that having a lead director accomplishes that goal. It does not.

CorpGov Recommendations for Johnson & Johnson – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov CBIS TRILLIUM CALVERT 
1a Mary Sue Coleman For For Against For
1b D. Scott Davis For For Against For
1c Ian E. L. Davis For For Against For
1d Alex Gorsky For For Against For
1e Susan L. Lindquist For For Against For
1f Mark B. McClellan For For Against For
1g Anne M. Mulcahy Against For Against For
1h William D. Perez Against For Against For
1i Charles Prince Against For Against For
1j A. Eugene Washington Against For Against For
1k Ronald A. Williams Against For Against For
2 Ratify Named Executive Officers’ Compensation Against For Against Against
3 Ratify PricewaterhouseCoopers LLP as Auditors For Against For For
4 Policy Regarding Overextended Directors For Against Against Against
5 Report on Consistency Between Corporate Values and Political Contributions For For For For
6 Require Independent Board Chairman For For For For

Looking at SharkRepellent.net for provisions unfriendly to shareowners:SharkRepellentGovernance Issues at Johnson & Johnson

  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • Supermajority vote requirement (66.67%) to approve mergers (default New Jersey state statute for companies organized prior to 1-1-1969).

Mark your Calendar to Submit Future Proposals at Johnson & Johnson

To be included in the Proxy Statement and proxy card for the 2016 Annual Meeting of Shareholders, a shareholder proposal must be received at our principal office on or before November 12, 2015 and must comply with Rule 14a-8 under the U.S. Securities and Exchange Act of 1934, as amended. 

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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