Costco Wholesale Corporation (COST), together with its subsidiaries, operates great membership warehouses. Costco Wholesale is one of the stocks in my portfolio. Their annual meeting is on January 29, 2016. ProxyDemocracy.org had collected the votes of four funds when I checked. I voted against two directors and for proxy access, therefore with the Board’s recommendations 57% 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.
Costco Wholesale: ISS Rating
From Yahoo! Finance: Costco Wholesale Corporation’s ISS Governance QuickScore as of Jan 1, 2016 is 10. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 9; Compensation: 8. 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: All but Audit.
Costco Wholesale: Compensation
Costco Wholesale’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO W. Craig Jelinek at $6.3M. I’m using Yahoo! Finance to determine market cap ($66B) and Wikipedia’s rule of thumb regarding classification. Costco Wholesale is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.3 million in 2014, so pay is well below that. Costco Wholesale shares outperformed the S & P 500 over the most recent one, two, five, and ten year time periods.
The MSCI GMIAnalyst report I reviewed gave Costco Wholesale 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, which is the case for 87.1% of companies in the S&P 500 index.
- 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.
Despite these issues, the fact that pay was substantially below average led me to vote in favor.
Costco Wholesale: Accounting
I have no reason to believe the auditor has rendered an inaccurate opinion, is engaged in poor accounting practices, or has a conflict of interest — so voted to confirm.
Costco Wholesale: Board Proposals
Costco has a classified board, with staggered terms. More than half the board has served for 19-28 years. The board includes no minorities and only 3 (21%) of the 14 directors are women. Ms. Wilderotter sits on five boards. That’s too many to be able to devote enough time, especially if there is a crisis at one or two. I voted against her, even though Costco needs more diversity on its board, not less. Due to the high proportion of board members with long tenure, I voted against Mr. James, who has been on the board for 28 years, to send a message that the board needs refreshment as well as greater diversity.
Costco Wholesale: Shareholder Proposals
In their opposition to my proxy access proposal, Costco Wholesale raises a number of objections to “The Specific Terms,” mostly around requirements that are left out of the 500-word statement, which the company is free to include in their bylaws. The SEC’s rule on proxy access took over 400 pages to describe. The proposal is consistent with their’s but can include safeguard’s such as many of those mentioned by Costco Wholesale in their opposition statement. While such items aren’t addressed by the proposal, and are therefore “not required” by the proposal, neither are they prohibited. The proposal is strictly advisory, subject to changes by the Board as they deem necessary. The Board’s substantive objections are twofold:
- The 25% cap on proxy access nominees. These are the same terms included in the SEC’s Rule 14a-11. The 25% cap means shareholders would be able to nominate up to 3 directors, since Costco Wholesale has 14 directors and proponents would round down to the nearest whole number.
- The proposal does not place a limit on the number of shareholders that can form a group to reach the required shareholdings of 3%, held for 3 years. Costco Wholesale objects that no-cap “could allow hundreds of shareholders to act together and administratively burden the Company.” The real burden is on the shareowners that have to coordinate with each other and provide evidence of ownership to Costco Wholesale.
Proxy access at Costco Wholesale should be at least as robust as that passed by the SEC after years and years of debate. Please vote in favor of proxy access.
Costco Wholesale: CorpGov Recommendations Below – Votes Against Board Position in Bold
I also checked Proxy Insight. They report the Canada Pension Plan Investment Board the Teacher Retirement System of Texas voted for all items, including proxy access.
|1.1||Director Hamilton E. James||Withhold||Withhold||Withhold||Withhold||Withhold|
|1.2||Director W. Craig Jelinek||For||Withhold||Withhold||Withhold||Withhold|
|1.3||Director John W. Stanton||For||Withhold||Withhold||Withhold||Withhold|
|1.4||Director Mary A. (Maggie) Wilderotter||Withhold||Withhold||Withhold||Withhold||Withhold|
|2||Ratify KPMG LLP as Auditors||For||For||For||Against||For|
|3||Ratify Executive Compensation||For||For||Against||For||Against|
|4||Adopt Proxy Access Right||For||For||For||For||For|
Costco Wholesale: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Classified board with staggered terms.
- No written consent unless unanimous by all shareholders.
- Supermajority vote requirement (66.67%) to amend certain charter provisions.
Costco Wholesale: Mark Your Calendar
In order for a shareholder proposal to be included in the proxy statement for the 2017 annual meeting of shareholders, it must comply with SEC Rule 14a-8 and be received by the Company no later than August 20, 2016. Proposals may be mailed to the Company, to the attention of the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027.
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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