Impax Laboratories Inc (NASD:IPXL) is engaged in the development, manufacture and marketing of bioequivalent pharmaceutical products (generics), in addition to the development and marketing of branded products. It is one of the stocks in my portfolio. Their annual meeting is coming up on 5/12/2015. ProxyDemocracy.org had the votes of one fund when I checked and voted on 5/6/2015. I also obtained the votes of CalSTRS, voted with management 45% of the time and assigned Impax Laboratories a proxy score of 45.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Impax Laboratories 2015 proxy in order to enhance corporate governance and long-term value.
Impax Laboratories’ ISS Rating
From Yahoo! Finance: Impax Laboratories Inc.’s ISS Governance QuickScore as of May 1, 2015 is 6. The pillar scores are Audit: 10; Board: 4; Shareholder Rights: 2; Compensation: 9. 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…. Audit and Compensation.
Impax Laboratories’ Compensation
Impax Laboratories’ Summary Compensation Table (p. 30) shows the highest paid named executive officer (NEO) was CEO G. Frederick Wilkinson at about $13M in 2014. I’m using Yahoo! Finance to determine market cap ($3.2B) and Wikipedia’s rule of thumb regarding classification.
Impax Laboratories is a mid-cap company. According to Equilar (page 6), the median CEO compensation at mid-cap corporations was $4.9 million in 2013, so Impax Laboratories’ pay was substantially more than that, even factoring for inflation. Impax Laboratories shares outperformed the NASDAQ over the most recent one, two, five and ten year periods, substantially over the last two.
The MSCI GMIAnalyst report I reviewed gave Impax Laboratories an overall grade of ‘D.’ 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 annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.
- 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.
Pay of almost $13M, even for exceptional performance, combined with the above issues, led me to vote against the pay package.
Impax Laboratories’ 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: Leslie Z. Benet, Ph.D., chairman, Robert L. Burr, Nigel Ten Fleming, Ph.D. and Peter R. Terreri.
I am concerned that 2/3 of the board have served for 12 years or longer. I wish I knew the rationale for CalSTRS and CBIS votes against.
Impax Laboratories’ Auditor
Impax Laboratories was flagged by MSCI’s GMIAnalyst for paying its independent auditor a higher level of fees for unrelated services than it paid for its annual audit. Even in the absence of other known accounting-related problems this kind of potentially conflicted relationship should be of concern to company shareholders. This is a relatively uncommon occurrence. I voted against the auditor.
Shareholder Proposals at Impax Laboratories
There were none.
CorpGov Recommendations for Impax Laboratories – Votes Against Board Position in Bold
Corporate Governance Issues at Impax Laboratories’
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to amend certain bylaw provisions.
Impax Laboratories’ Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
All stockholder proposals, including stockholder recommendations of potential director nominees, for our 2016 annual meeting must be received by our Corporate Secretary in writing at our principal executive offices located at 30831 Huntwood Avenue, Hayward, California 94544, no later than December 16, 2015 to receive consideration for inclusion in our proxy materials relating to that meeting under Rule 14a-8 of the Exchange Act. If the date of our 2015 annual general meeting is more than 30 days before or 30 days after the anniversary date of our 2015 annual general meeting, the deadline for inclusion of proposals in our proxy statement will instead be a reasonable time before we begin to print and mail our proxy materials. In addition, the proposal must comply with the requirements of Rule 14a-8 of the Exchange Act, any other applicable rules established by the SEC and our amended and restated bylaws, as amended.
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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