NetGear, Inc. (NASD:NTGR), one of the stocks in my portfolio, is a global networking company that delivers products to consumers, businesses and service providers. Their annual meeting is coming up on 6/2/2015. ProxyDemocracy.org had the votes of one fund when I checked on 5/22/2015. I voted with Board recommendations 83% of the time.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the NetGear, Inc. 2015 proxy to enhance corporate governance and long-term value.
NetGear: ISS Rating
From Yahoo! Finance: Netgear Inc.’s ISS Governance QuickScore as of May 1, 2015 is 3. The pillar scores are Audit: 1; Board: 2; Shareholder Rights: 5; Compensation: 3. 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.
NetGear: Compensation
NetGear Summary Compensation Table shows the highest paid named executive officer (NEO) was Patrick C.S. Lo, Chairman and Chief Executive Officer at about $2.8M in 2014. I’m using Yahoo! Finance to determine market cap ($1.1B) and Wikipedia’s rule of thumb regarding classification.
NetGear 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 NetGear’s pay was about in line with median, considering inflation. NetGear shares underperformed the NASDAQ over the latest 1, 5 and 10 year periods.
The MSCI GMIAnalyst report I reviewed gave NetGear 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.
It was close, but given long-term underperformance and the above, I voted Against the pay plan.
NetGear: Board of Directors and Board Proposals
I normally vote against the directors on the compensation committee, since they recommended the pay package and stock plan to the full board. In this case, it was so close, I decided not to. However, I am concerned that 60% of the directors have served for 10 years or more. The board might benefit from refreshment.
Additionally, I voted in favor of the Board’s measure to reduce supermajority requirements. Their proposal was a direct reaction to my own proposal on the same topic. With the Board’s endorsement, this should be a relatively easy win… with your positive vote.
NetGear: Auditor
I voted against ratifying the auditor, following along CBIS reporting through Proxy Democracy. Frankly, I am unaware of any potential conflict of interest, so am going along with them based on trust.
Shareholder Proposals at NetGear
As indicated above, my proposal was essentially subsumed into the Board’s.
CorpGov Recommendations for NetGear – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CBIS |
|---|---|---|---|
| 1.1 | Elect Director Patrick C.S. Lo | For | For |
| 1.2 | Elect Director Jocelyn E. Carter-Miller | For | For |
| 1.3 | Elect Director Ralph E. Faison | For | For |
| 1.4 | Elect Director A. Timothy Godwin | For | For |
| 1.5 | Elect Director Jef T. Graham | For | For |
| 1.6 | Elect Director Gregory J. Rossmann | For | For |
| 1.7 | Elect Director Barbara V. Scherer | For | For |
| 1.8 | Elect Director Julie A. Shimer | For | For |
| 1.9 | Elect Director Thomas H. Waechter | For | For |
| 2 | Ratify PricewaterhouseCoopers LLP as Auditors | Against | Against |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For |
| 4 | Reduce Supermajority Vote Requirement | For | For |
Corporate Governance Issues at NetGear
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Plurality vote standard to elect directors with no resignation policy.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.
NetGear Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
As a stockholder, you may be entitled to present proposals for action at a forthcoming meeting if you comply with the requirements of the proxy rules established by the Securities and Exchange Commission. Proposals by our stockholders intended to be presented for consideration at our 2016 Annual Meeting of Stockholders must be received by us no later than December 19, 2015 (120 calendar days prior to the anniversary of the mailing date of this proxy statement), in order that they may be included in the proxy statement and form of proxy related to that meeting. The submission of the stockholder proposal does not guarantee that it will be included in our 2016 proxy statement.
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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