Cognizant Technology Solutions Corp (NASD:CTSH), one of the stocks in my portfolio, provides information technology (IT), consulting, and business process services worldwide. Their annual meeting is coming up on 6/2/2015. ProxyDemocracy.org had the votes of three funds when I checked on 5/19/2015. I voted with Board recommendations 33% of the time.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Cognizant Technology Solutions 2015 proxy to enhance corporate governance and long-term value.
Cognizant Technology Solutions: ISS Rating
From Yahoo! Finance: Cognizant Technology Solutions Corporation’s ISS Governance QuickScore as of May 1, 2015 is 7. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 9; Compensation: 4. 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.
Cognizant Technology Solutions: Compensation
Cognizant Technology Solutions Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Francisco D’Souza at about $11.3M in 2014. I’m using Yahoo! Finance to determine market cap ($40B) and Wikipedia’s rule of thumb regarding classification.
Cognizant Technology Solutions 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 Cognizant Technology Solutions’ pay was higher than median. Cognizant Technology Solutions shares outperformed the NASDAQ over the latest 1, 2, 5 and 10 year periods.
The MSCI GMIAnalyst report I reviewed gave Cognizant Technology Solutions 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.
- 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 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.
- 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.
I voted Against the pay plan.
Cognizant Technology Solutions: Board of Directors and Board Proposals
I normally vote against the directors on the compensation committee, since they recommended the pay package and stock plan to the full board: John N. Fox, Jr., John E. Klein, Michael Patsalos-Fox, Robert E. Weissman. Unfortunately, because the board was recently unclassified, I could not vote against Mr. Klein, since his term expires next year.
Cognizant Technology Solutions: Auditor
I voted against ratifying the auditor, following along with the funds reporting through Proxy Democracy.
Shareholder Proposals at Cognizant Technology Solutions
Of course, I voted in favor of my own proposal to allow shareholders to act by written consent if they cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. As you can imagine, obtaining written consent from shareholders for a majority of shares would be a difficult task and would only be undertaken in extreme situations. The top ten holders have 30% of the shares, so taking action would require agreement from far more than Vanguard, SSgA Funds, Fidelity, BlackRock, Waddell & Reed, etc. It would be like herding cats and expensive to go beyond the top 50 holders but it could be an important shareholder right in case of an emergency situation.
CorpGov Recommendations for Cognizant Technology Solutions – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CBIS | TRILLIUM | CALVERT | Your Vote |
|---|---|---|---|---|---|---|
| 1a | Elect Director Michael Patsalos-Fox | Against | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 1b | Elect Director Robert E. Weissman | Against | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 1c | Elect Director Francisco D’Souza | For | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 1d | Elect Director John N. Fox, Jr. | Against | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 1e | Elect Director Leo S. Mackay, Jr. | For | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 1f | Elect Director Thomas M. Wendel | For | For | For | For | |
| Trillium Asset Management: Research There is both gender and racial diversity on the board. There is at least 30 percent diversity. | ||||||
| Calvert Social Index Fund: There is both gender and racial diversity on the board. | ||||||
| Calvert Social Investment Fund: There is both gender and racial diversity on the board. | ||||||
| 2 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For | Against | For | |
| Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars. | ||||||
| Calvert Social Index Fund: A vote FOR this proposal is warranted, with caution. The long-term incentive award is contingent upon annual revenue goals, rather than multi-year performance achievement and both the long-term and short term incentive programs consider annual revenue performance. However, performance targets utilized under both programs are set higher than the prior year’s maximum target levels, and the majority of LTI is performance contingent. | ||||||
| Calvert Social Investment Fund: A vote FOR this proposal is warranted, with caution. The long-term incentive award is contingent upon annual revenue goals, rather than multi-year performance achievement and both the long-term and short term incentive programs consider annual revenue performance. However, performance targets utilized under both programs are set higher than the prior year’s maximum target levels, and the majority of LTI is performance contingent. | ||||||
| 3 | Ratify PricewaterhouseCoopers LLP as Auditors | Against | Against | Against | Against | |
| Trillium Asset Management: Research Greater than 25 percent of total audit fees were attributable to non-audit work. | ||||||
| Calvert Social Index Fund: More than 25 percent of total audit fees paid to the auditor were attributable to non-audit work. | ||||||
| Calvert Social Investment Fund: More than 25 percent of total audit fees paid to the auditor were attributable to non-audit work. | ||||||
| 4 | Provide Right to Act by Written Consent | For | For | For | For | |
| Trillium Asset Management: Research A vote FOR this proposal is warranted given that the ability to act by written consent would enhance shareholder rights. | ||||||
| Calvert Social Index Fund: A vote FOR this proposal is warranted given that the ability to act by written consent would enhance shareholder rights. | ||||||
| Calvert Social Investment Fund: A vote FOR this proposal is warranted given that the ability to act by written consent would enhance shareholder rights. | ||||||
Corporate Governance Issues at Cognizant Technology Solutions
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Special meetings can only be called by shareholders holding not less than 25% of the voting power.
- Supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.
Cognizant Technology Solutions Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
Stockholders who intend to have a proposal considered for inclusion in our proxy materials for presentation at our 2016 Annual Meeting of Stockholders pursuant to Rule 14a-8 under the Exchange Act must submit the proposal to our Secretary at our offices at Glenpointe Centre West, 500 Frank W. Burr Blvd., Teaneck, New Jersey 07666, in writing not later than December 25, 2015.
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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