Kansas City Southern $KSU is one of the stocks in my portfolio. They are a transportation holding company with domestic and international rail operations in North America focused on the north/south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. Their annual meeting is coming up on 5/7/2015. ProxyDemocracy.org had the votes of three funds when I checked and voted on 4/29/2015. I added the votes of OTPP. I voted with management 60% of the time and assigned Kansas City Southern a proxy score of 60.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Kansas City Southern 2015 proxy in order to enhance corporate governance and long-term value.
Kansas City Southern’s ISS Rating
From Yahoo! Finance (profile page): NRG Energy, Inc.’s ISS Governance QuickScore as of Apr 1, 2015 is 3. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 8; Compensation: 1. 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…. Shareholder Rights.
Kansas City Southern’s Compensation
Kansas City Southern Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO David L. Starling at about $5.7M in 2014. I’m using Yahoo! Finance (summary page) to determine market cap ($8.6B) and Wikipedia’s rule of thumb regarding classification.
Kansas City Southern is a mid-cap company. According to Equilar (page 6), the median CEO compensation at large-cap corporations was $4.9 million in 2013, so NRG Energy’s pay was substantially above than that, even factoring for inflation. Kansas City Southern shares underperformed the S&P 500 over the most recent six month, one, two, five and ten year periods.
The GMIAnalyst report I reviewed gave Kansas City Southern 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.
Given underperformance and the above, I voted against the pay package.
Kansas City Southern 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 would have voted against: Henry R. Davis, Chairman, Robert J. Druten, and Rodney E. Slater had the opportunity been available. The board was declassified last year but directors elected prior or at the 2014 annual meeting will continue to serve out their terms.
Kansas City Southern Accounting
I voted to ratify KPMG LLP as auditor, since less than 25 percent of total audit fees paid are attributable to non-audit work.
Shareholder Proposals at Kansas City Southern
Of course, I voted in favor of my (James McRitchie) proposal to allow shareowners with 10% of shares to call a special meeting. Inability to call a special can block potential benefits to shareholders. Beneficial tender offers may be precluded because of a poison pill or other antitakeover provisions. Allowing shareholders to call a special meeting can resolve such issues. All shareholders would be notified of any such meetings.
CorpGov Recommendations for Kansas City Southern – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CALVERT | OTPP | CBIS | TRILLIUM |
|---|---|---|---|---|---|---|
| 1.1 | Lu M. Cordova | For | For | For | For | For |
| 1.2 | Thomas A. McDonnell | For | For | For | For | For |
| 2 | Ratify Auditor KPMG LLP | For | For | For | For | For |
| 3 | Ratify Executive Pay | Against | For | For | For | Against |
| 4 | Reduce Requirements to Call Special Meetings | For | For | For | For | For |
Corporate Governance Issues at Kansas City Southern
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 25% of the voting power.
Kansas City Southern Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
If a holder of our Common Stock wishes to present a proposal for inclusion in our proxy statement for next year’s annual meeting of stockholders, the proposal must be made in accordance with the applicable laws and rules of the SEC and the interpretations thereof, as well as our Bylaws. Any such proposal should be sent to our Corporate Secretary at P.O. Box 219335, Kansas City, Missouri 64121-9335 (or if by express delivery to 427 West 12th Street, Kansas City, Missouri 64105) and must be received no later than December 8, 2015.
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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