Union Pacific Corporation: Proxy Score 50

Union PacificUnion Pacific Corporation (NYSE:UNP) is one of the stocks in my portfolio. Union Pacific is primarily a railroad operator. Their annual meeting is coming up on 5/14/2015. ProxyDemocracy.org had the votes of two funds when I checked and voted on 5/7/2015. I voted with management 50% of the time and assigned Union Pacific a proxy score of 50.

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

Union Pacific: ISS Rating 

From Yahoo! Finance: Union Pacific Corporation’s ISS Governance QuickScore as of Apr 1, 2015 is 1. The pillar scores are Audit: 1; Board: 7; Shareholder Rights: 1; Compensation: 2. 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…. the Board.

Union Pacific: Compensation

Union Pacific’s Summary Compensation Table shows the highest paid named executive officer (NEO) was former Chairman at about $51.8M and current CEO/Chair John J. Koraleski at about $28M in 2014. I’m using Yahoo! Finance to determine market cap ($94B) and Wikipedia’s rule of thumb regarding classification.

Union Pacific is a large-cap company.  According to Equilar (page 6), the median CEO compensation at large-cap corporations was $10.1 million in 2013, so Union Pacific’s pay was substantially more than that, even factoring for inflation. Union Pacific shares outperformed the S&P 500 over the most recent one, two, five and ten year periods, but substantially lagged during the last six months.

MSCI GMIAnalystThe MSCI GMIAnalyst report I reviewed gave Union Pacific 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.
  • 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.

Pay of almost $52M and $28M seems too high, even for good performance, combined with the above issues, led me to vote against the pay package.

Union Pacific: 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 voted against: Erroll B. Davis, Jr., Chair, Andrew H. Card, Jr., David B. Dillon, Steven R. Rogel and Jose H. Villarreal.

Union Pacific: Auditor

I voted for the auditor, since it appears less than 25 percent of total audit fees paid to the auditor were attributable to non-audit work.

Shareholder Proposals at Union Pacific

Of course I voted “For” my (James McRitchie) own proposal urging that our executive pay committee adopt a policy requiring senior executives to retain a significant percentage of stock acquired through equity pay programs until reaching normal retirement age. This would better align pay with long-term performance.

I also voted in favor of Mr. Chevedden’s proposal for an independent chairman, starting with the next CEO. When our CEO also chairs the board, this arrangement can hinder our board’s ability to monitor the CEO’s performance and of shareholders to speak candidly. The Board’s opposition statement would have shareowners believe have a lead director offers equivalent advantages. However, if lead directors held equivalent authority they wouldn’t object to a mere change in titles.

CorpGov Recommendations for Union Pacific – Votes Against Board Position in Bold

# PROPOSAL TEXT CorpGov CBIS TRILLIUM
1.1 Elect Director Andrew H. Card, Jr. Against For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.2 Elect Director Erroll B. Davis, Jr. Against For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.3 Elect Director David B. Dillon Against For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.4 Elect Director Lance M. Fritz For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.5 Elect Director Judith Richards Hope For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.6 Elect Director John J. Koraleski For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.7 Elect Director Charles C. Krulak For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.8 Elect Director Michael R. McCarthy For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.9 Elect Director Michael W. McConnell For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.10 Elect Director Thomas F. McLarty, III For For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.11 Elect Director Steven R. Rogel Against For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
1.12 Elect Director Jose H. Villarreal Against For Against
Trillium Asset Management: Research Less than 30 percent of the board is diverse.There is both gender and racial diversity on the board.
2 Ratify Deloitte & Touche LLP as Auditors For Against For
Trillium Asset Management: Research Less than 25 percent of total audit fees paid are attributable to non-audit work.
3 Advisory Vote to Ratify Named Executive Officers’ Compensation Against For Against
Trillium Asset Management: Research Total CEO compensation exceeds 7 million dollars. Total compensation to outside directors exceeds 100,000 dollars.
4 Stock Retention/Holding Period For For For
Trillium Asset Management: Research A vote FOR this proposal is warranted as the more rigorous guidelines recommended by the proponent may better address concerns about creating a strong link between the interests of top executives and long-term shareholder value.
5 Require Independent Board Chairman For For For
Trillium Asset Management: Research A vote FOR this proposal is warranted given the importance of having an independent chairman of the board.

Corporate Governance Issues at Union Pacific

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

  • Unanimous written consent (default Utah state statute for companies incorporated before 7-1-1992).

Union Pacific Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals (Thanks for allowing Faxes):

Under SEC rules, any shareholder who wishes to present a proposal to be included in our Proxy Statement and introduced at our 2016 Annual Meeting of Shareholders must submit the proposal to the Secretary of the Company so that it is received no later than the close of business on December 3, 2015, and must satisfy the other requirements of SEC Rule 14a-8.

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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