DigitalGlobe: Proxy Score 33

DigitalGlobe Inc (NYSE:DGI) one of the stocks in my portfolio, offers earth imagery products comprising imagery from its constellation of high-resolution satellites, as well as satellite and aerial imagery acquired from third party suppliers. Their annual meeting is coming up on 5/26/2015. ProxyDemocracy.org had the votes of two funds when I checked on 5/15/2015. 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 DigitalGlobe 2015 proxy to enhance corporate governance and long-term value. 

DigitalGlobe: ISS Rating

From Yahoo! Finance: DigitalGlobe, Inc.’s ISS Governance QuickScore as of May 1, 2015 is 9. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 7; Compensation: 10. 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 and Compensation.

DigitalGlobe: Compensation

DigitalGlobe Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Jeffrey R. Tarr at about $5.2M in 2014. I’m using Yahoo! Finance to determine market cap ($2.3B) and Wikipedia’s rule of thumb regarding classification.

DigitalGlobe is a mid-cap company (barely). According to Equilar (page 6), the median CEO compensation at large-cap corporations was $4.9 million in 2013, so DigitalGlobe’s pay was slightly higher than median, even while barely making it into the mid-cap range. DigitalGlobe shares underperforming the S&P 500 over the most recent one, two, five and ten year periods. CEO pay has risen more dramatically from $3.5M three years ago. The Board is rewarding underperformance.

The MSCI GMIAnalyst report I reviewed gave DigitalGlobe an overall grade of ‘C.’ According to the report:

•  The CEO’s potential cash severance pay exceeds five times his or her annual pay, which occurs in only 4.1% of companies in the home market. Such excessive ‘golden parachute’ payments weaken the pay for performance linkage and enable pay for failure.
• 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.
• 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.

I voted Against the pay plan.

DigitalGlobe: Board of Directors and Board Proposals 

I voted against the directors on the compensation committee, since they recommended the pay package and stock plan to the full board: Messrs. Jenson, Hough, and Ms. Decyk. Another reason for voting against Decyk, is overboarding. Four boards is too many to give full attention. Additionally, she owns no shares in our company.

DigitalGlobe: Auditor

I voted to ratify the auditor, since I saw no potential conflicts of interest, although, as discussed by GMIAnalyst, the audit committee does not appear fully independent.

The DigitalGlobe board of directors does not currently include a fully independent audit committee, a serious concern for company shareholders. We note that 87.1% of company boards in this market maintain a fully independent audit committee, which is critical in providing appropriate oversight of financial reporting.

Shareholder Proposals at DigitalGlobe

None.

CorpGov Recommendations for DigitalGlobe – Votes Against Board Position in Bold

Corporate Governance Issues at DigitalGlobe

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• Classified board with staggered terms.
• Directors may only be removed for cause and only by the vote of 80% 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 (80%) to amend certain charter and all bylaw provisions.

DigitalGlobe Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

If you are submitting a proposal to be included in next year’s Proxy Statement, you may do so by following the procedures prescribed in Rule 14a-8 promulgated under the Exchange Act. Shareowner proposals submitted for inclusion in next year’s Proxy Statement must be received by our Corporate Secretary at our executive offices no later than December 16, 2015. In the event that we elect to hold our 2016 annual meeting of shareowners more than 30 days before or after May 26, 2016, such shareowner proposals must be received by us within a reasonable time before we begin to print and send our proxy materials for the 2016 annual meeting of shareowners.

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.