Tractor Supply

Tractor Supply Company (TSCO): Proxy Score 100

Tractor SupplyTractor Supply Company (TSCO) is one of the stocks in my portfolio. They offer a comprehensive selection of merchandise, which include equine, livestock, pet and small animal products; hardware, truck, towing and tool products; seasonal products, including lawn and garden items, power equipment, gifts and toys; maintenance products for agricultural and rural use, and work/recreational clothing and footwear. Their annual meeting is coming up on 5/5/2015. ProxyDemocracy.org had the votes of three funds when I checked and voted on 4/27/2015. I voted with management 100% of the time and assigned Tractor Supply a proxy score of 100.

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

Tractor Supply’s ISS Rating 

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

Tractor Supply’s Compensation

Tractor Supply Company’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Gregory A. Sandfort at  about $4.7M in 2014.  I’m using Yahoo! Finance to determine market cap ($12.4B) and Wikipedia’s rule of thumb regarding classification.

Tractor Supply 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 Tractor Supply’s pay was substantially less than that, even factoring for inflation. Tractor Supply shares outperformed the S&P 500 over the most recent six month, one, two, five and ten year periods.

GMIAnalyst

The GMIAnalyst report I reviewed gave Tractor Supply an overall grade of ‘C.’ 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.

Tractor Supply is at the small end of large-caps. Despite the above issues, it appears shareholders are getting reasonable value with regard to our CEO’s pay.  I am happy to vote in favor of the pay package.

Tractor Supply Board of Directors and Board Proposals 

Tractor Supply is one of the newest companies in my portfolio. While the company and board appear to be doing a good job, I am concerned for our company’s future. Tractor Supply has no minority board members. Funds reporting on ProxyDemocracy.org are voting against the board for that reason.

Additionally, our company does not currently report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor has it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. In the area of workplace safety Tractor Supply has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle.

Small- and mid-caps often have a low profile, allowing them to fly under the social radar. If Tractor Supply is to continue to expand it will need to improve its public image in these areas and would benefit from a more diverse and forward-thinking board. I may join others in voting against board members in future if movement is not forthcoming.

Tractor Supply Accounting

I voted to ratify Ernst & Young LLP as auditor, since less than 25 percent of total audit fees paid are attributable to non-audit work.

Shareholder Proposals at Tractor Supply

There are none.

CorpGov Recommendations for Tractor Supply – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov CALVERT  CBIS TRILLIUM
1.1 Cynthia T. Jamison For Withhold Withhold Withhold
1.2 Johnston C. Adams For Withhold Withhold Withhold
1.3 Peter D. Bewley For Withhold Withhold Withhold
1.4 Richard W. Frost For Withhold Withhold Withhold
1.5 Keith R. Halbert For Withhold Withhold Withhold
1.6 George MacKenzie For Withhold Withhold Withhold
1.7 Edna K. Morris For Withhold Withhold Withhold
1.8 Gregory A. Sandfort For Withhold Withhold Withhold
1.9 Mark J. Weikel For Withhold Withhold Withhold
2 Ratify Auditors Ernst & Young LLP For For Against For
3 Ratify Executive Pay For Against For Against

Corporate Governance Issues at Tractor Supply

Looking at SharkRepellent.net for provisions unfriendly to shareowners:SharkRepellent

  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (66.67%) to amend certain charter provisions.

Tractor Supply Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Shareholders who desire to submit to the Company proposals for possible inclusion in the Company’s proxy materials for the 2016 Annual Meeting of Shareholders must submit such proposals in writing by November 20, 2015 to the Corporate Secretary of the Company at 5401 Virginia Way, Brentwood, Tennessee 37027.

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 5 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.

Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven. Additional findings by Mark Van Clieaf of Organizational Capital Partners, as reported in The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design:

  • Some 75% of companies have no balance sheet or capital efficiency metrics in their disclosed performance measurement and long-term incentive plan design.
  • Only 17% of companies specifically disclose return on invested capital or economic profit as a long-term performance measure for long-term executive compensation.
  • Some 47% of S&P 1500 companies over the last five years (2008 – 2012) did not generate a positive cumulative economic profit or return on invested capital greater than their cost of capital.
  • More than 85% of the S&P 1500 have no disclosed line of sight process metrics aligned to future value such as innovation and growth drivers.
  • Only 10% of all long-term incentives have a disclosed longest performance period for named officers of greater than three years.

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