Caterpillar (CAT): Proxy Score 39

Caterpillar Inc. (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It is one of the stocks in my portfolio. Their annual meeting is coming up on 6/10/2015. ProxyDemocracy.org had the vote of two funds when I checked and voted on 6/4/2015.  As I was writing, CalSTRS also announced their vote. They voted against the board more than me. I voted with the board 39% of the time and assigned Caterpillar a proxy score of 39.

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

Caterpillar: ISS Rating 

Caterpillar: Compensation

Caterpillar Summary Compensation Table (p. 28) shows the highest paid named executive officer (NEO) was Chairman and CEO Douglas R. Oberhelman, at about $17.1M in 2014.  I’m using Yahoo! Finance to determine market cap ($52.1B) and Wikipedia’s rule of thumb regarding classification.

Caterpillar 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 Caterpillar’s pay is above that number. Caterpillar shares under-performed the S & P 500 over the most recent one, two, five, and ten year periods.

As noted in Caterpillar’s CEO Just Got A Big Raise, And It Explains What’s Wrong With American Capitalism, the company justified the pay for ‘performance‘ by pointing out a good year measured on a ‘per-share basis.’ That’s only because of the company’s share buy back plan. That’s not pay for performance; that’s pay for manipulation.

The GMIAnalyst report I reviewed gave Caterpillar an overall grade of ‘D.’ 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 annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.

With far above median relative pay, stock price under-performance and the above issues, I voted against the pay package.

Caterpillar: Board of Directors and Board Proposals

Generally, when I vote against the pay package I also vote against the compensation committee, since they recommended the pay package to the full board: Miles D. White (Chairman), David L. Calhoun, and Jesse J. Greene, Jr.

I am also concerned that two directors at Caterpillar sits on four boards, too many to give full attention to Caterpillar. For that reason, I voted against Ambassador Schwab and Mr. Huntsman.

Caterpillar: Accounting

I voted against ratifying Caterpillar’s auditor, since far more than 25 percent of total audit fees paid appear attributable to non-audit work.

Shareholder Proposals at Caterpillar 

With regard to shareholder proposals, of course I voted in favor of my wife’s (Myra K. Young) proposal to eventually move to an independent director. Despite Douglas Oberhelman serving as both chairman and CEO, the board has not individually designated an independent lead director. Instead, the board elected the chairman of the Public Policy and Governance Committee to serve as the presiding director. When the roles of CEO and chairman are combined, all the authority is vested in one individual. With underperformance and only gimmickry to achieve ‘pay for performance,’ we can see the results. Vote FOR #4, Independent Chair.

I also voted in favor of John Chevedden’s proposal to provide for the right to act by written consent, a critical need in certain emergency situations. Vote FOR #5, Written Consent.

I also voted in favor of the other two shareholder proposals. Both #6 and #7 requests the Board to review and amend or report on policies related to human rights. The Board’s opposition statement to both says, “Given that the proposal has already been substantially implemented, the Board does not believe this proposal is necessary.” However, they made the same pitch to the SEC in an attempt to keep the proposals off the proxy and SEC staff disagreed with their conclusion. See here and here. Please Vote FOR #6 & #7.

CorpGov Recommendations for Caterpillar – Votes Against Board Position in Bold

Governance Issues at Caterpillar

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

• No action can be taken without a meeting by written consent.
• Special meetings can only be called by shareholders holding not less than 25% of the voting power.

Caterpillar Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

A proposal for action or the nomination of a director to be presented by any stockholder at the 2016 annual meeting of stockholders will be acted on only if the proposal is to be included in our proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the proposal is received at the office of the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629, on or before January 3, 2016;

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 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 % if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.