ITC Holdings

ITC Holdings: Proxy Score 43

ITC HoldingsITC Holdings Corp. (NYSE:ITC), one of the stocks in my portfolio, is an online and technology-enabled quick-turn manufacturer of custom parts for prototyping and short-run production. Their annual meeting is coming up on 5/20/2015. ProxyDemocracy.org had the votes of one fund when I checked and voted on 5/13/2015. I voted with management 43% of the time and assigned ITC Holdings a proxy score of 43.

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

ITC Holdings: ISS Rating 

From Yahoo! Finance: ITC Holdings Corp.’s ISS Governance QuickScore as of May 1, 2015 is 8. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 4; 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…. Board and Compensation.

ITC Holdings: Compensation

ITC Holdings Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Joseph L. Welch, at about $7.8M in 2014. I’m using Yahoo! Finance to determine market cap ($5.4B) and Wikipedia’s rule of thumb regarding classification.

ITC Holdings 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 ITC Holdings pay was above median. ITC Holdings shares outperformed the S&P 500 substantially over the most recent five and ten year periods. However, it has increasingly underperformed the S&P 500 over the most recent 1 and 2 year periods.

MSCI GMIAnalystThe MSCI GMIAnalyst report I reviewed gave Proto Labs 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 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.

Given that the pay is above median, total shareholder return is declining and the above issues, I voted against the pay plan.

ITC Holdings: Board of Directors and Board Proposals 

When I vote against the pay plan I generally vote against the compensation committee as well, since they recommended it. Therefore, I voted against: David R. Lopez, Hazel R. O’Leary and Thomas G. Stephens. I voted in favor of the employee stock purchase plan to incentivize employees but against the omnibus stock plan as too dilutive.

ITC Holdings: Auditor

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

Shareholder Proposals at ITC Holdings

Of course, I voted in favor of my own proposal to lower the threshold for special meetings from 25% to 10%. Our proposal on this topic last year lost with 49% of the vote. This is simple good governance, necessary in emergency situations.

CorpGov Recommendations for ITC Holdings – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov CALVERT TRILLIUM
1.1 Elect Director Albert Ernst For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.2 Elect Director Christopher H. Franklin For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.3 Elect Director Edward G. Jepsen For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.4 Elect Director David R. Lopez Withhold For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.5 Elect Director Hazel R. O’Leary Withhold For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.6 Elect Director Thomas G. Stephens Withhold For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.7 Elect Director G. Bennett Stewart, III For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.8 Elect Director Lee C. Stewart For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
1.9 Elect Director Joseph L. Welch For For Withhold
Calvert Social Index Fund: There is both gender and racial diversity on the board.
Trillium Asset Management: Research A shareholder proposal received at least 20% shareholder support in the last year (shares outstanding).There is both gender and racial diversity on the board.Less than 30 percent of the board is diverse.
2 Ratify Named Executive Officers’ Compensation Against Against Against
Calvert Social Index Fund: A vote AGAINST this proposal is warranted. The company has made some positive changes to its compensation programs following low shareholder support for this proposal last year, but certain concerns remain. CEO base salary remains high and has a ratcheting effect on other elements of pay, the company paid several significant discretionary bonuses, equity was entirely time-based, and the company has problematic benchmarking provisions. The magnitude of CEO pay exceeds the 75th percentile of the company’s peer group.The CEO’s total pay exceeds 4 times the average NEO pay.
Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars.
3 Ratify Deloitte & Touche LLP as Auditors For For For
Calvert Social Index Fund: Less than 25 percent of total audit fees paid to the auditor were attributable to non-audit work.
Trillium Asset Management: Research Less than 25 percent of total audit fees paid are attributable to non-audit work.
4 Approve Qualified Employee Stock Purchase Plan For For For
Calvert Social Index Fund: A vote FOR this proposal is warranted given that:* The purchase price is reasonable;* The shares reserved is relatively conservative; and* The offering period is within the limits prescribed by Section 423 of the Internal Revenue Code.
Trillium Asset Management: Research A vote FOR this proposal is warranted given that: * The purchase price is reasonable; * The shares reserved is relatively conservative; and * The offering period is within the limits prescribed by Section 423 of the Internal Revenue Code.
5 Approve Omnibus Stock Plan Against For Against
Calvert Social Index Fund: The plan warrants shareholder approval.
Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars.
6 Call Special Meetings For For For
Calvert Social Index Fund: Calvert supports the right of shareholders to call a special meeting.
Trillium Asset Management: Research A vote FOR this proposal is warranted, as the right to call special meetings at a 10-percent threshold would further enhance shareholders’ rights.

Corporate Governance Issues at ITC Holdings

Looking at SharkRepellent.net for provisions unfriendly to shareowners:SharkRepellent

  •  Plurality vote standard to elect directors with no resignation policy.
  • Unanimous written consent.

ITC Holdings Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Any proposal by a shareholder of the Company to be considered for inclusion in the proxy statement for the 2016 annual meeting must be received by Wendy McIntyre, our Corporate Secretary, by the close of business on December 11, 2015. Such proposals should be addressed to her at our principal executive offices and should satisfy the informational requirements applicable to shareholder proposals contained in the relevant SEC rules. If the date for the 2016 Annual Meeting is significantly different than the first anniversary of the 2015 Annual Meeting, SEC Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides for an adjustment to the notice period described above.

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.

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