iRobot Corporation: Proxy Score 33

iRobot Corporation (NASD:IRBT), one of the stocks in my portfolio, offers consumer , defense and security products, remote presence products and handles contract research and development projects. Their annual meeting is coming up on 5/20/2015. ProxyDemocracy.org had no votes from funds when I checked and voted on 5/13/2015. I voted with the Board 33% of the time and assigned iRobot a proxy score of 33.

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

iRobot: ISS Rating 

From Yahoo! Finance: iRobot Corporation’s ISS Governance QuickScore as of May 1, 2015 is 4. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 5; Compensation: 7. 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.

iRobot: Compensation

iRobot’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Colin M. Angle at about $3.6M in 2014. I’m using Yahoo! Finance to determine market cap ($955M) and Wikipedia’s rule of thumb regarding classification.

iRobot is a small-cap company. According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.7 million in 2013, so iRobot’s pay last year was way above median. iRobot’s shares underperformed the S&P 500 over the most recent one, two, five and ten year periods.

The MSCI GMIAnalyst report I reviewed gave iRobot 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.
• 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 and the omnibus stock plan

iRobot: Board of Directors and Board Proposals 

I voted against the directors on the compensation committee, since they recommended the pay package to the full board: Deborah Ellinger and Ronald Chwang. I also voted against Michelle V. Stacy who owns no stock. I like board members with their own skin in the game.

Of course I also voted in favor of the Board’s proposal to end supermajority requirements. My proposal on this subject won 77% of the vote, even though iRobot took me to court to try to keep the proposal off the proxy. They failed. Please push this one over the goal line by voting ‘For.’

iRobot: Auditor

I voted for the auditor, not seeing any potential conflict of interest.

Shareholder Proposals at iRobot

Of course, I voted in favor of my own proposal to declassify the board. Only 10% of the S&P 500 and 31% of the S&P 1500 have classified boards, which often serve as an entrenchment device for underperforming boards.

CorpGov Recommendations for iRobot – Votes Against Board Position in Bold

Corporate Governance Issues at iRobot

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• No action can be taken without a meeting by written consent.
• Shareholders cannot call special meetings.
•  Supermajority vote requirement (75%) to amend certain charter and all bylaw provisions.

iRobot Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Proposals of stockholders intended for inclusion in the proxy statement to be furnished to all stockholders entitled to vote at our 2016 annual meeting of stockholders, pursuant to Rule 14a-8 promulgated under the Exchange Act by the Securities and Exchange Commission, must be received at the Company’s principal executive offices not later than December 15, 2015.

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.