Walgreens Boots Alliance: Proxy Score 54

Walgreens Boots Alliance Inc (NASD:WBA), one of the stocks in my portfolio, is a global pharmacy-led, health and wellbeing enterprise with three divisions: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. Their annual meeting is coming up on 5/28/2015. ProxyDemocracy.org had the votes of two funds when I checked on 5/19/2015. I voted with Board recommendations 54% of the time.

View Proxy Statement. Read Warnings below. What follows are my recommendations on how to vote the Walgreens Boots Alliance 2015 proxy to enhance corporate governance and long-term value. 

Walgreens Boots Alliance: ISS Rating

From Yahoo! Finance: Walgreens Boots Alliance, Inc.’s ISS Governance QuickScore as of May 1, 2015 is 1. The pillar scores are Audit: 2; Board: 7; Shareholder Rights: 1; 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…. Board.

Walgreens Boots Alliance: Compensation

Walgreens Boots Alliance Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Gregory D. Wasson at about $16.7M in 2014. I’m using Yahoo! Finance to determine market cap ($93.5B) and Wikipedia’s rule of thumb regarding classification.

Walgreens Boots Alliance 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 Walgreens Boots Alliance’s pay was substantially higher than median. Walgreens Boots Alliance shares outperformed the NASDAQ since inception a few months ago.

The MSCI GMIAnalyst report I reviewed gave Walgreens Boots Alliance 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 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.

I voted Against the pay plan.

Walgreens Boots Alliance: Board of Directors and Board Proposals 

I voted against the directors on the compensation committee, since they recommended the pay package and stock plan to the full board: William C. Foote, Nancy M. Schlichting. Steven A. Davis, and Ginger L. Graham. Another reason for voting against Ms. Schlichting is that she has been on Walgreens board for 9 years but owns no stock. I like directors with some of their own “skin” in the game.

Walgreens Boots Alliance: Auditor

I voted to ratify the auditor, since I saw no potential conflicts of interest

Shareholder Proposals at Walgreens Boots Alliance

I voted in favor of all the shareholder proposals at Walgreens Boots Alliance.

Mr. Chevedden’s proposal that senior executives retain significant stock until reaching retirement will incentivize them for the long-term, guarding against short-term gaming of the system.

Mr. Steiner’s proposal to reduce accelerated vesting of equity awards in the event of a change of control will better ensure pay for performance.

The proxy access proposal from the CtW Investment Group seeks to give shareholders the basic right to place shareholder nominees on the proxy. It is a standard 3% held for 3 years proposal but limits nominations to 20%, rather than 25%. I would have preferred the higher proportion but have agreed to 20% myself at other companies. This is a very important right.

Singing Field Foundation’s proposal simply asks that sustainability be among the performance measures used in setting the pay of senior executives… a very reasonable first step.

CorpGov Recommendations for Walgreens Boots Alliance – Votes Against Board Position in Bold

Corporate Governance Issues at Walgreens Boots Alliance

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• Special meetings can only be called by shareholders holding not less than 20% of the voting power.

Walgreens Boots Alliance Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

Stockholders may submit proposals appropriate for stockholder action at the Company’s Annual Meeting consistent with the regulations of the SEC. If you want Walgreens Boots Alliance to consider including a proposal in its proxy statement relating to the 2016 Annual Meeting, you must have delivered it in writing to the Company’s Corporate Secretary, Walgreens Boots Alliance, Inc., 108 Wilmot Road, Deerfield, Illinois 60015 by August 11, 2015 (or, if the date of the 2016 Annual Meeting is moved by more than 30 days, the deadline will be a reasonable time before the Company begins to print and send its proxy materials, which date will be announced by the Company), and such proposal and your submission thereof must comply with applicable SEC rules and regulations regarding the inclusion of stockholder proposals in company-sponsored proxy materials.

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.