Gilead Sciences (GILD): Proxy Score 41

Gilead Sciences $GILD is one of the stocks in my portfolio. They are a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need Their annual meeting is coming up on 5/6/2015. ProxyDemocracy.org had the votes of four funds when I checked and voted on 4/28/2015. I voted with management 47% of the time and assigned Gilead Sciences a proxy score of 47.

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

Gilead Sciences’ ISS Rating 

From Yahoo! Finance: Gilead Sciences Inc.’s ISS Governance QuickScore as of Apr 1, 2015 is 3. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 4; Compensation: 5. 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…. Compensation.

Gilead Sciences’s Compensation

Gilead Sciences’ Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair John C. Martin at  about $19M in 2014.  I’m using Yahoo! Finance to determine market cap ($154B) and Wikipedia’s rule of thumb regarding classification.

Gilead Sciences 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 Gilead Sciences’ pay was substantially above than that, even factoring for inflation. Gilead Sciences shares outperformed the NASDAQ over the most recent one, two, five and ten year periods, while substantially lagging during the most recent six month period.

The GMIAnalyst report I reviewed gave Gilead Sciences 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.
• Market-priced stock options may provide rewards due to a rising market alone, regardless of individual performance. We note that the CEO profited about USD 137.3 million from the exercise of 1,687,508 stock options and over USD 50 million from the vesting of 594,000 stock awards.

Despite the great stock performance, I voted against the pay package as being just too high. As mentioned above by GMI, Martin recently exercised options worth $137M. The company reports that he has almost 11M shares (worth over $1B). I don’t see how another $9M above median pay for large-cap CEOs is going to incentivize him any more than he is already. At this point in his wealth cycle, isn’t it about something other than the money?

Gilead Sciences Board of Directors and Board Proposals

Generally, when I vote against the pay package I also vote against the compensation committee, since they recommend the pay package to the full board. Therefore, I voted against: John W. Madigan, Chairman, Kevin E. Lofton, Nicholas G. Moore, and Per Wold-Olsen. I voted in favor of the employee stock purchase plan to help motivate and reward employees of our company.

Gilead Sciences Accounting

I voted to not ratify Ernst & Young LLP’s auditor, since less than 25 percent of total audit fees paid are attributable to non-audit work.

Shareholder Proposals at Gilead Sciences

Of course, I voted in favor of my (James McRitchie) own proposal to provide shareholders the right to act by written consent. A similar proposal won 48% of the vote last year. Inability to act via written consent can block potential benefits to shareholders. For example, beneficial tender offers may be precluded because of a bidder’s inability to take action by written consent to remove certain impediments to completion of an offer, such as a poison pill or other antitakeover provisions.

I also voted in favor of John Chevedden’s proposal to move to an independent board chair with the next CEO. The board should be planning for the future. This is a simple good governance measure. Gilead Sciences argues a lead director can fulfill the same role. They can’t.

Trillium Asset Management proposes that Gilead Sciences issue an annual sustainability report. Of course, every large company should be producing such reports. I voted For.

I also voted For the UAW Retiree Medical Benefits Trust request to report on the risks to Gilead from rising pressure to contain U.S. specialty drug prices. There are risks. Shareholders should get a report on the basics.

CorpGov Recommendations for Gilead Sciences – Votes Against Board Position in Bold

Corporate Governance Issues at Gilead Sciences

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 20% of the voting power.

Gilead Sciences Proxy Proposal Deadline for Next Year

eBay is yet another company that attempts to put up artificial barriers to discourage filing paperless proxy proposals. Mark your calendar to submit future proposals:

You may submit proposals for consideration at future stockholder meetings. For a stockholder proposal to be considered for inclusion in our proxy statement for the 2016 annual meeting of stockholders, the Corporate Secretary must receive the written proposal at our principal executive offices no later than November 28, 2015. Such proposals also must comply with SEC regulations under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company proxy materials. Proposals should be addressed to: Corporate Secretary, Gilead Sciences, Inc., 333 Lakeside Drive, Foster City, California 94404.

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.