Ellie Mae

Ellie Mae: Proxy Score 50

Ellie MaeEllie Mae Inc (NYSE:ELLI), one of the stocks in my portfolio, is a provider of on-demand software solutions and services for the residential mortgage industry in the United States. Their annual meeting is coming up on 6/17/2015. ProxyDemocracy.org had the vote of one fund when I checked and voted on 6/11/2015. I also located the vote of CalSTRS.  I voted with the board 50% of the time and assigned Ellie Mae a proxy score of 50.

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

Ellie Mae: ISS Rating

From Yahoo! Finance: Ellie Mae, Inc.’s ISS Governance QuickScore as of Jun 1, 2015 is 7. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 6; Compensation: 8. Brought to you by Institutional Shareholder Services (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.

Ellie Mae: Compensation

Ellie Mae Summary Compensation Table (p. 34) shows the highest paid named executive officer (NEO) was CEO Sigmund Anderman, at about $5.8M in 2014.  I’m using Yahoo! Finance to determine market cap ($1.9B) and Wikipedia’s rule of thumb regarding classification.

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

The MSCI GMIAnalyst report I reviewed gave Ellie Mae an overall grade of ‘D.’ According to the report:MSCI GMIAnalyst

  •  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.
  • 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.

With above median relative pay and the above issues, I voted against the pay package and stock plan.

Ellie Mae: 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: Bernard M. Notas (chair), Craig Davis, A. Barr Dolan. Unfortunately, only Davis is up for election this year. I also voted against Frank J. Schultz, since he doesn’t own any stock in our company. I think directors should have skin in the game.  

Of course, I voted in favor of the Board’s proposal to eliminate supermajority requirements, which was probably prompted by my wife’s (Myra K. Young’s) proposal on that subject last year.

Ellie Mae: Accounting

I voted in favor of ratifying Ellie Mae’s auditor, since less than 25 percent of total audit fees paid appear attributable to non-audit work.

Shareholder Proposals at Ellie Mae

None.

CorpGov Recommendations for Ellie Mae – Votes Against Board Position in Bold

NUM. PROPOSAL TEXT CorpGov CBIS
1.1 Elect Director Sigmund Anderman For Withhold
1.2 Elect Director Craig Davis Withhold Withhold
1.3 Elect Director Frank Schultz Withhold Withhold
2 Ratify Grant Thornton LLP as Auditors For For
3 Advisory Vote to Ratify Named Executive Officers’ Compensation Against For
4 Eliminate Supermajority Vote Requirement For For

SharkRepellentGovernance Issues at Ellie Mae

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

  • Classified board with staggered terms.
  • Plurality vote standard to elect directors with no resignation policy.
  • No action can be taken without a meeting by written consent.
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (66.67%) to amend certain charter provisions.

Ellie Mae Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

To be considered for inclusion in our proxy materials for next year’s annual meeting in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), your proposal must be submitted in writing by December 25, 2015, to our Secretary at Ellie Mae, Inc., 4420 Rosewood Drive, Suite 500, Pleasanton, California 94588 and must otherwise comply with the requirements of Rule 14a-8 of the Exchange Act.

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.

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