Genomic Health: Proxy Score 60

Genomic Health, Inc. (NASD:GHDX), one of the stocks in my portfolio, is a molecular diagnostics company focused on the global development and commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer allowing physicians and patients to make individualized treatment decisions. Their annual meeting is coming up on 6/11/2015. ProxyDemocracy.org had the vote of one fund when I checked and voted on 6/9/2015. I also included CalSTRS‘ vote in the table below.  I voted with management 60% of the time and assigned Genomic Health a proxy score of 60.

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

Genomic Health: ISS Rating

Genomic Health: Compensation

Genomic Health Summary Compensation Table (p. 19) shows the highest paid named executive officer (NEO) was CEO/Chair Kimberly J. Popovits, at about $3M in 2014.  I’m using Yahoo! Finance to determine market cap ($846M) and Wikipedia’s rule of thumb regarding classification.

Genomic Health is a small-cap company.  According to Equilar (page 6), the median CEO compensation at small-cap corporations was $2.7M million in 2013, so SciClone Pharmaceuticals’ pay is over that number even after inflation. Genomic Health shares under-performed the NASDAQ over the most recent one, two and five year periods but out-performed over the most recent ten year period.

The MSCI GMIAnalyst report I reviewed gave Genomic Health 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 company pays long-term incentives to executives without requiring the company to perform above the median of its peer group. Incentive plans that pay for mediocre performance undermine the linkage between pay and performance.
• 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.
• 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, combined with under-performance and the above issues, I voted against the pay package and stock plan.

Genomic Health: 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: Felix J. Baker, Ph.D. and Henry J. Fuchs, M.D..

Genomic Health: Accounting

I voted to ratify Genomic Health’s auditor, since less than 25% percent of total audit fees paid are attributable to non-audit work.

Shareholder Proposals at Genomic Health

None.

CorpGov Recommendations for Genomic Health – Votes Against Board Position in Bold

Governance Issues at Genomic Health

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

•  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 and all bylaw provisions.

Genomic Health Proxy Proposal Deadline for Next Year

Mark your calendar to submit future proposals:

 If a stockholder wishes to present a proposal to be considered for inclusion in our proxy statement for the 2016 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC. One of the requirements is that the proposal be received by Genomic Health’s Secretary no later than January 1, 2016. Proposals we receive after that date will not be included in the proxy statement. We urge stockholders to submit proposals by Certified Mail—Return Receipt Requested.

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.