Berry Plastics Group: Proxy Score 17

Berry Plastics Group Inc (BERY) provides innovative plastic consumer packaging and engineered materials. It is one of the stocks in my portfolio and their annual meeting is on February 24, 2016. ProxyDemocracy.org had collected two votes when I checked. I voted against the pay plan, directors and in favor of Myra Young proposal to elect each director annually, therefore with the Board’s recommendations only 17% 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. 

Berry Plastics Group: ISS Rating

From Yahoo! Finance: Berry Plastics Group, Inc.’s ISS Governance QuickScore as of Feb 1, 2016 is 6. The pillar scores are Audit: 1; Board: 7; Shareholder Rights: 7; 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, Compensation and Shareholder Rights.

Berry Plastics Group: Compensation

Berry Plastics Group’s Summary Compensation Table (page 26) shows the highest paid named executive officer (NEO) was Jonathan D. Rich, Chairman and Chief Executive Officer at $8.7M. I’m using Yahoo! Finance to determine market cap ($3.6B) and Wikipedia’s rule of thumb regarding classification. Berry Plastics Group is a mid-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $5.3 million in 2014.Berry Plastics Group shares outperformed the S&P500 over the most recent two and five year time periods but underperformed in the most recent one year period. 

The MSCI GMIAnalyst report I reviewed gave Berry Plastics Group 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 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.
• The board has not established a formal clawback policy regarding its executive incentive pay to recoup incentive payouts that may have been the undeserved result of erroneous or fraudulent financial reporting.

Given these issues, Berry Plastics Group underperformance last year, and the fact that pay was substantially above average, I voted against the pay plan, and would have voted against the compensation committee members, Jonathan F. Foster, Carl J. Rickertsen and
B. Evan Bayh, if I had been given the opportunity. 

Berry Plastics Group: 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.

Berry Plastics Group: Board Proposals

Berry Plastics Group has a classified board, with staggered terms. A majority of directors hold no stock in our company. Given that fact, as well as issues outlined above and below, I voted against all directors in hopes of sounding a wake-up call.

Berry Plastics Group: Shareholder Proposals

Of course, I supported my wife’s proposal #4 to elect each director annually. About 62% of mid-cap companies and 90% of large-cap companies have declassified boards. The Berry Plastics Group should join the 21st century with regard to corporate governance practices. We need to be able to hold each director accountable each year. The proposal allows phase in over three years, although we would prefer the board to endorse a proposal on next year’s proxy to amend the charter and have the change effective in a year. I see CalSTRS is also voting in favor of electing each director annually.

Berry Plastics Group: CorpGov Recommendations Below – Votes Against Board Position in Bold

I also checked Proxy Insight. Unfortunately, they had not recorded any advance votes at this time. Most advance notifiers do so within a short time before the annual meeting. My votes won’t change, so I’m announcing early. Although Proxy Insight had collected no advance votes, it was good to see that most funds vote in favor of proposals to declassify boards between 95% and 99% of the time they are given the opportunity. The top three shareholders of Berry Plastics Group vote to declassify 99% of the time: TIAA-CREF, Vanguard, and BlackRock. I hope readers will join them. 

Berry Plastics Group: Issues for Future Proposals

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
• No proxy access provision allows shareholders to place nominees on the company proxy

Berry Plastics Group: Mark Your Calendar

Under the rules of the Securities and Exchange Commission, any of our stockholders wishing to have a proposal considered for inclusion in our 2017 proxy solicitation materials must set forth such proposal in writing and file it with our Secretary on or before the close of business on September 26, 2016. However, if the date of the 2017 Annual Meeting is more than 30 days before or after February 24, 2017, then the deadline for submitting any stockholder proposal for inclusion in the proxy materials relating to such Annual Meeting will be a reasonable time before we begin to print or mail such proxy materials. The inclusion of any such stockholder proposals in such proxy materials will be subject to the requirements of the proxy rules adopted under the Securities Exchange Act of 1934, as amended, including Rule 14a-8.

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.