Proto Labs Inc (NYSE:PRLB), 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 5/11/2015. I voted with management 100% of the time and assigned Proto Labs a proxy score of 100.
View Proxy Statement (It would have been nice to have links to index and headings). Read Warnings below. What follows are my recommendations on how to vote the Proto Labs 2015 proxy to enhance corporate governance and long-term value.
Proto Labs: ISS Rating
From Yahoo! Finance: Proto Labs, Inc.’s ISS Governance QuickScore as of May 1, 2015 is 2. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 2; Compensation: 4. 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.
Proto Labs: Compensation
Proto Labs Summary Compensation Table shows the highest paid named executive officer (NEO) was CEOVictoria M. Holt, at about $1.9M in 2014. I’m using Yahoo! Finance to determine market cap ($1.8B) and Wikipedia’s rule of thumb regarding classification.
Proto Labs is a amall-cap company. According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.7 million in 2013, so Proto Labs pay was below median. Proto Labs shares outperformed the S&P 500 over the most recent five year period and was very close to that average to the most recent 1 and 2 year periods.
The MSCI GMIAnalyst report I reviewed gave Proto Labs an overall grade of ‘A.’ 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.
- 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.
- The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.
Despite the above issues, I voted For the pay plan.
Proto Labs: Board of Directors and Board Proposals
I voted for all the directors and the Board’s proposal to move to majority voting for uncontested elections in response to a proposal I submitted in December. Majority voting has been widely adopted in the United States, especially among larger-cap companies, but more than 71.3% of the Russell 3000 remains under a plurality or plurality plus voting standard. Nice to see Proto Labs initiate this positive change after I requested it.
Proto Labs: Auditor
I voted to ratify the auditor, since I see no potential conflicts of interest.
Shareholder Proposals at Proto Labs
There were none. The board moved to adopt majority voting about a month after I filed a substantially similar proposal with them — another victory for shareholders.
CorpGov Recommendations for Proto Labs – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CBIS |
|---|---|---|---|
| 1.1 | Elect Director Lawrence J. Lukis | For | Withhold |
| 1.2 | Elect Director Victoria M. Holt | For | Withhold |
| 1.3 | Elect Director Rainer Gawlick | For | Withhold |
| 1.4 | Elect Director John B. Goodman | For | Withhold |
| 1.5 | Elect Director Douglas W. Kohrs | For | Withhold |
| 1.6 | Elect Director Brian K. Smith | For | Withhold |
| 1.7 | Elect Director Sven A. Wehrwein | For | Withhold |
| 2 | Ratify Ernst & Young LLP as Auditors | For | Against |
| 3 | Ratify Named Executive Officers’ Compensation | For | For |
| 4 | Majority Voting for Uncontested Elections | For | For |
Corporate Governance Issues at Proto Labs
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Plurality vote standard to elect directors with no resignation policy.
- Unanimous written consent.
Proto Labs Proxy Proposal Deadline for Next Year
Mark your calendar to submit future proposals:
Proposals of our shareholders that are intended to be presented by such shareholders at our fiscal 2015 Annual Meeting of Shareholders to be held in calendar 2016 and that shareholders desire to have included in our proxy materials related to such Annual Meeting must be received by us at our principal executive offices no later than 5:00 p.m. Central Time, December 9, 2015, which is 120 calendar days prior to the anniversary of this year’s mailing date. Upon timely receipt of any such proposal we will determine whether or not to include such proposal in the proxy statement and proxy in accordance with applicable regulations governing the solicitation of proxies.
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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