Kellogg Company (K), which manufactures and markets ready-to-eat cereal and convenience foods, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/24/2015. ProxyDemocracy.org had the vote of no funds when I checked and voted on 4/20/2015. I also see that CalSTRS votes still are not getting picked up but they voted with management on everything except the shareholder proposal. I voted with management 75% of the time, and assigned Kellogg a proxy score of 75.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Kellogg 2015 proxy in order to enhance corporate governance and long-term value.
Kellogg ISS Rating
From Yahoo! Finance: Kellogg Company’s ISS Governance QuickScore as of Apr 1, 2015 is 9. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 10; Compensation: 3. 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.
Kellogg Compensation
Kellogg’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO and Chairman John Bryant, at about $9.3M in 2014. I’m using Yahoo! Finance to determine market cap ($23B) and Wikipedia’s rule of thumb regarding classification.
Kellogg is a large-cap company. According to Equilar (page 6), the median CEO compensation at mid-cap corporations was $10.1 million in 2013, so Kellogg’s pay is less than that, especially after factoring for inflation. Unfortunately, Kellogg shares underperformed in comparison to the S&P 500 over the most recent one, two, five, and ten year periods.
The GMIAnalyst report I reviewed gave Kellogg 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, although disclosure of such metrics are essential for investors to assess the rigor of incentive programs. How do we know Kellogg will ever outperform?
- 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.
- 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.
Paying more than $9M for continued mediocre performance combined with the above issues doesn’t seem right even though it is less than median pay, so I voted against the pay package.
Kellogg 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. However, in this case I did not. However, I may do so in future years if pay isn’t better tied to performance. Or, I may look at strategies to change the board or split the chair and CEO positions.
I am also concerned that five board members have served for 15 years or more. Although I am not voting against any directors because of this factor, I would like to see more board refreshment.
Kellogg Accounting
I voted to ratify Kellogg’s auditor, PriceWaterhouseCoopers, since far less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Kellogg
With regard to shareholder proposals. Of course I voted in favor of my own proposal to reduce supermajority requirements. Under current requirements it take a two-thirds majority to take such action as approving a merger or amending corporate documents. Why not let the majority decide? Should it take a two-thirds majority to approve a bylaw amendment allowing proxy access? ISS gives Kellogg its worst rating possible for shareholder rights. Last year 62% of shareholders voted in favor of a proposal to eliminate Kellogg’s classified board system that prevents a vote on each director every year and is frequently used as an entrenchment device. However, the proposal was not adopted because a two-thirds majority vote was not obtained. Vote in favor of reducing supermajority requirement and improvements may follow.
CorpGov Recommendations for Kellogg – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | DOMINI | CALVERT | CBIS |
|---|---|---|---|---|---|
| 1.1 | Benjamin Carson | For | For | For | For |
| 1.2 | John Dillon | For | For | For | For |
| 1.3 | Zachary Gund | For | For | For | For |
| 1.4 | Jim Jenness | For | For | For | For |
| 1.5 | Don Knauss | For | For | For | For |
| 2 | Ratify Pay | Against | Against | For | For |
| 3 | Ratify Auditor | For | For | For | Against |
| 4 | Reduce Supermajority Vote Requirement | For | For | For | For |
Corporate Governance Issues at Kellogg
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
Governance Issues at Kellogg, it couldn’t get much worse.
- Classified board with staggered terms.
- Plurality vote standard to elect directors with resignation policy.
- Directors may only be removed for cause and only by the vote of 66.67% of the shares entitled to vote.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to approve mergers not approved by a majority of continuing directors.
- Supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions.
Kellogg Proxy Proposal Deadline for Next Year
Mark your Calendar to Submit Future Proposals at Kellogg:
Shareowner proposals submitted for inclusion in our proxy statement for the 2016 Annual Meeting of Shareowners must be received by us no later than November 6, 2015. Other Shareowner proposals to be submitted from the floor must be received by us not earlier than November 6, 2015 and not later than December 6, 2015, and must meet certain other requirements specified in our bylaws.
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.
CalSTRS is voting FOR all resolutions at Kellogg. We also have votes for Canada Pension Plan, Colorado PERA and Teachers Retirement of Texas all of whom voted FOR each resolution.
Thanks much Nick. Good to learn.