Illumina: Proxy Score 37

Illumina, Inc. (NASD:ILMN), one of the stocks in my portfolio, is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function.  Their annual meeting is coming up on 5/27/2015. ProxyDemocracy.org had the votes of two funds when I checked on 5/18/2015. I voted with Board recommendations 37% of the time.

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

Illumina: ISS Rating

From Yahoo! Finance: Illumina Inc.’s ISS Governance QuickScore as of May 1, 2015 is 5. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 5; Compensation: 6. 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…. Board, Shareholder Rights and Compensation.

Illumina: Compensation

Illumina Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Jay T. Flatley at about $14.9M in 2014. I’m using Yahoo! Finance to determine market cap ($28.7B) and Wikipedia’s rule of thumb regarding classification.

Illumina 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 Illumina’s pay was slightly higher than median. Illumina shares outperformed the NASDAQ over the most recent one, two, five and ten year periods.

The MSCI GMIAnalyst report I reviewed gave Illumina 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.
• 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.
• 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 and stock plans.

Illumina: 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: A. Blaine Bowman (Chairperson) and William H. Rastetter, Ph.D. Another reason for voting against Dr. Rastetter is that sitting on four boards is too many to give full attention.

Illumina: Auditor

I voted to ratify the auditor, since I saw no potential conflicts of interest

Shareholder Proposals at Illumina

None.

CorpGov Recommendations for Illumina – Votes Against Board Position in Bold

Corporate Governance Issues at Illumina

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• Classified board with staggered terms.
• No action can be taken without a meeting by written consent.
• Shareholders cannot call special meetings.
• Supermajority vote requirement (67%) to amend certain charter and all bylaw provisions.

Illumina Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Stockholder proposals that are intended to be presented at our 2016 annual meeting of stockholders must be received at our principal executive offices no later than December 8, 2015, in order to be included in the proxy statement and form of proxy relating to that meeting, and must meet all other requirements as specified in our bylaws and Rule 14a-8 under the Securities Exchange Act of 1934.

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.