Cisco Systems, Inc. (CSCO) designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. Cisco is one of the stocks in my portfolio. Their annual meeting is on November 19, 2015. ProxyDemocracy.org had collected the votes of four funds when I checked. I voted with the Board’s recommendations 50% of the time. View Proxy Statement.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Cisco Systems: ISS Rating
From Yahoo! Finance: Cisco Systems, Inc.’s ISS Governance QuickScore as of Nov 1, 2015 is 1. The pillar scores are Audit: 2; Board: 5; Shareholder Rights: 1; Compensation: 7. Brought to us 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: Board and Compensation.
Cisco Systems: Compensation
Cisco’s Summary Compensation Table shows the highest paid named executive officer (NEO) was Former Executive Vice President and Chief Financial Officer Frank A. Calderoni at about $27.2M. I’m using Yahoo! Finance to determine market cap ($133B) and Wikipedia’s rule of thumb regarding classification. Cisco 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 pay at Cisco is well above that. Cisco shares outperformed the S&P 500 over the most recent two year period, were even over the latest one year period and underperformed over the most recent five and ten year periods.
The MSCI GMIAnalyst report I reviewed gave Cisco Systems an overall grade of ‘C.’ According to the report:
- The company has not disclosed specific, quantifiable performance target objectives for the CEO.
- 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.
Performance was below average and pay was substantially above average. I voted against the pay package and the members of the compensation committee: Roderick C. McGeary, Chairperson, Carol A. Bartz, M. Michele Burns, and Brian L. Halla.
Cisco Systems: Accounting
There is no reason to believe the auditor has rendered an inaccurate opinion or is engaged in poor accounting practices. I voted for the auditor.
Cisco Systems: Board Proposals
I voted against the pay plan and the directors mentioned above. I am also concerned that half the board has served for twelve years or more.
Cisco Systems: Shareholder Proposals
I voted in favor of Cisco adopting the Holy Land Principles. This proposal was a new one to me earlier this year and I was at first a bit skeptical. However, after looking into them, I am in total agreement. These are like the Sullivan Principles we applied in South Africa to help end apartheid. Check out founder Fr. Sean Mc Manus. Corporations have a role in bringing peace to this troubled area through nondiscrimination. I’m surprised by the abstentions.
Implementation of the Holy Land Principles, which are both pro-Jewish and pro-Palestinian, will demonstrate Cisco’s concern for human rights and equality of opportunity in its international operations.
Of course, I voted in favor of my own proposal for proxy access. According to ProxyPulse, “seventy percent of the more than 80 proxy access proposals voted on this season received majority support from shareholders, averaging 57%.” Proxy access is quickly becoming the norm. Set a Google alert for ‘proxy access’ and every few days you will get an announcement such as the following.
CBL & Associates Properties, Inc. Friday announced that it intends to adopt a proxy access by-law amendment in response to the advisory vote at its annual meeting earlier this year.
The amendment to the company’s by-laws would allow shareholders that have owned at least 3 percent of the company’s outstanding common stock continually for at least three consecutive years to have their own director nominees, representing up to 25 percent of the Board seats, included in the company’s proxy materials, along with the candidates nominated by the company’s Board of Directors.
While I don’t expect proxy access to be implemented at Cisco for the foreseeable future, shareholders should put this important mechanism in place so it is available when or if the time comes. Stock performance for the latest 5 and 10 year periods lag the market. Cisco’s opposition statement claims:
Proxy access may create the opportunity for special interest groups or individuals with a small minority stake to promote an agenda that is not in the best interest of all shareholders. Proxy access makes it easier for those groups to use the threat of a contested election to seek concessions from Cisco relating to a particular special interest without being faced with the potential costs of a proxy solicitation.
The “threat’ of “special interest” groups mentioned above would only occur where the agenda and candidates being pushed would appeal to a majority of shares voted. In that case, they can hardly be called “special interest.” Think about it. Would it really be bad to have two candidates on the the proxy nominated by shareholders and eleven candidates nominated by the board? That’s the potential “threat.” Others might call it choice. Maybe nominees would start telling us why they are the better candidate.
Readers might want to check out Proxy Access 2016: Market Trends and Shareholder Proposal Developments from Sullivan & Cromwell LLP. I think it could be read as a warning to companies to adopt proxy access now, before they get a proposal using my updated template.
Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel and Rock, Edward B., Does Majority Voting Improve Board Accountability? (November 4, 2015). University of Chicago Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 15-31 found
a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder-responsiveness going forward. By contrast, later adopters, as a group, seem to have adopted majority voting only semi-voluntarily. Among this group, majority voting seems to have led to more shareholder-responsive behavior.
These differences between early and late adopters have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Reform advocates, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive. They then seem to use the widespread adoption of majority voting to create pressure on the non-adopting firms. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.
We believe the same logic will apply to proxy access. Companies that resist adoption are likely to be those that need it the most. Please vote in favor of proxy access to ensure Cisco Systems is an early adopter.
Cisco Systems: CorpGov Recommendations Below – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | TRILLIUM | CALVERT | CBIS | DOMINI |
|---|---|---|---|---|---|---|
| 1a | Elect Director Carol A. Bartz | Against | For | For | For | For |
| 1b | Elect Director M. Michele Burns | Against | For | Against | For | For |
| 1c | Elect Director Michael D. Capellas | For | For | For | For | For |
| 1d | Elect Director John T. Chambers | For | For | For | For | Against |
| 1e | Elect Director Brian L. Halla | Against | For | For | For | For |
| 1f | Elect Director John L. Hennessy | For | For | For | For | For |
| 1g | Elect Director Kristina M. Johnson | For | For | For | For | For |
| 1h | Elect Director Roderick C. McGeary | Against | For | For | For | For |
| 1i | Elect Director Charles H. Robbins | For | For | For | For | For |
| 1j | Elect Director Arun Sarin | For | For | For | For | For |
| 1k | Elect Director Steven M. West | For | For | For | For | For |
| 2 | Ratify Executive Officer Compensation | Against | Against | Against | For | Against |
| 3 | Ratify Auditors | For | For | For | Against | For |
| 4 | Adopt Holy Land Principles | For | Abstain | Abstain | For | Abstain |
| 5 | Adopt Proxy Access Right | For | For | For | For | For |
Cisco Systems: Issues for Future Proposals
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.
- No proxy access is available to shareholder groups.
- Supermajority vote requirement (80%) to amend certain charter provisions.
Cisco Systems: Mark your Calendar
In the event that a stockholder wishes to have a proposal considered for presentation at the 2016 Annual Meeting of Stockholders and included in the Company’s proxy statement and form of proxy used in connection with such meeting, the proposal must be forwarded to the Company’s Secretary so that it is received no later than May 28, 2016. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under 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 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.
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