PDL BioPharma Inc (NASD:PDLI), one of the stocks in my portfolio, manages a portfolio of patents and royalty assets in the United States and Europe. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases. Their annual meeting is coming up on 5/28/2015. ProxyDemocracy.org had the votes of one fund when I checked on 5/19/2015. I voted with Board recommendations 40% of the time.
View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the PDL BioPharma 2015 proxy to enhance corporate governance and long-term value.
PDL BioPharma: ISS Rating
From Yahoo! Finance: PDL BioPharma, Inc.’s ISS Governance QuickScore as of May 1, 2015 is 3. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 4; Compensation: 5. 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.
PDL BioPharma: Compensation
PDL BioPharma Summary Compensation Table (p. 55) shows the highest paid named executive officer (NEO) was CEO John P. McLaughlin at about $4.1M in 2014. I’m using Yahoo! Finance to determine market cap ($1.1B) and Wikipedia’s rule of thumb regarding classification.
PDL BioPharma 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 PDL BioPharma’s pay was substantially higher than median. PDL BioPharma shares underperformed the NASDAQ over the latest 1, 2, 5 and 10 year periods.
The MSCI GMIAnalyst report I reviewed gave PDL BioPharma 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.
- 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.
I voted Against the pay and stock plans.
PDL BioPharma: 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: Harold Selick, Ph.D. (chairperson), Jody S. Lindell, Paul W. Sandman. Unfortunately, because of the classified board, I could only vote against Ms. Lindell.
PDL BioPharma: Auditor
I voted to ratify the auditor, since I saw no potential conflicts of interest
Shareholder Proposals at PDL BioPharma
None.
CorpGov Recommendations for PDL BioPharma – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CBIS |
|---|---|---|---|
| 1.1 | Elect Director Jody S. Lindell | Withhold | Withhold |
| 1.2 | Elect Director John P. McLaughlin | For | Withhold |
| 2 | Ratify PricewaterhouseCoopers LLP as Auditors | For | Against |
| 3 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For |
| 4 | Amend Omnibus Stock Plan | Against | For |
Corporate Governance Issues at PDL BioPharma
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Classified board with staggered terms.
- Shareholders cannot call special meetings.
PDL BioPharma Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
If a stockholder wishes to have a proposal considered for presentation directly, without its inclusion in our proxy statement, at the 2016 Annual Meeting of Stockholders, including for a recommendation of candidates for election to the Board, the stockholder must submit the proposal to us in writing between January 28, 2016, and February 27, 2016, which is not less than ninety (90) calendar days nor more than one hundred twenty (120) calendar days in advance of the date of the one-year anniversary of the Company’s 2015 Annual Meeting of Stockholders. Proposals should be addressed to:
PDL BioPharma, Inc., Attention: Corporate Secretary, 932 Southwood Boulevard, Incline Village, NV 89451
Stockholders submitting a proposal must provide certain other information as described in our Bylaws. Copies of our Bylaws are available online in the “Investor Relations – Corporate Governance” section of our corporate Internet site at www.pdl.com. In addition, proposals submitted for inclusion in our proxy statement must comply with Rule 14a-8 under the Exchange Act and must be received at our principal executive offices shown above no later than the close of business on December 18, 2015, which is not less than 120 days before the date of the Company’s proxy statement released to stockholders in connection with the previous year’s annual meeting.
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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