BRCD

Brocade Communications BRCD: Proxy Score 57

BRCDBrocade Communications Systems, Inc. (BRCD) provides storage area networking and Internet protocol networking solutions for businesses and organizations worldwide. $BRCD is one of the stocks in my portfolio. Their annual meeting is on April 7, 2016.

ProxyDemocracy.org had collected the vote of one fund when I checked. I voted AGAINST the pay package, compensation committee and against the exclusive jurisdiction forum. I voted 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. 

BRCD: ISS Rating

From Yahoo! Finance: Brocade Communications Systems, Inc.’s ISS Governance QuickScore as of Mar 1, 2016 is 1. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 1; Compensation: 2. 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.

BRCD: Compensation

BRCD’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Lloyd A. Carney at $8.4M. I’m using Yahoo! Finance to determine market cap ($4.2B) and Wikipedia’s rule of thumb regarding classification. BRCD is a mid-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at mid-cap corporations was $4.9 million in 2014, so pay is far above that amount. BRCD shares underperformed the NASDAQ over the most recent one, two, five, and ten year time periods. GMIAnalyst

The MSCI GMIAnalyst report I reviewed gave BRCD 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 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.
  • The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO may weaken the ability of equity awards to align executives’ interests with long-term value creation.

The pay plan because pay isn’t sufficiently tied to performance. According to Calvert:

The magnitude of CEO pay exceeds the 75th percentile of the company’s peer group. The CEO’s total pay exceeds 4 times the average NEO pay.

Because of the issues above and underperformance, I voted against the pay package and members of the compensation committee: L. William Krause (Chair), David L. House, David E. Roberson and Sanjay Vaswani. 

BRCD: 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.  

BRCD: Board Proposals

As stated above, I voted against the pay package and the compensation committee.  I voted to ratify the auditor and for the employee stock plan. I am very much in favor of substantive employee ownership at BRCD to encourage long-term commitment and participation.

I voted against the board’s exclusive forum provision. That would remove the right of shareholders to choose the jurisdiction most favorable to a positive outcome. The Council of Institutional Investors studied the issue extensively and adopted the following policy:

1.9   Judicial Forum:  Companies should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum. Nor should companies attempt to bar shareowners from the courts through the introduction of forced arbitration clauses.

BRCD: Shareholder Proposals

None at this time. I agreed to withdraw my proxy access proposal in return for their agreement to amend their bylaws to allow a shareholder or group of no more than 30 stockholders holding 3% or more of the outstanding common stock continuously for at least three (3) years to nominate two individuals or 20% of the board and place their names on the proxy.

Proxy InsightBRCD: CorpGov Recommendations Below – Votes Against Board Position in Bold

ProxyDemocracy.org reports that Calvert voted against the pay package and for everything else. Proxy Insight reports Canada Pension Plan Investment Board (CPPIB), Colorado PERS, Teacher Retirement System of Texas (TRS) voted in favor of all items. (I put them in the same column below to save space.) CalSTRS and Australia’s Local Government Super voted the same, except they both voted against the exclusive forum provision.

# PROPOSAL TEXT CorpGov CalSTRS/
CPPIB/COPERA/TRST
1.1 Elect Director Judy Bruner For For
1.2 Elect Director Lloyd A. Carney For For
1.3 Elect Director Renato A. DiPentima For For
1.4 Elect Director Alan L. Earhart For For
1.5 Elect Director John W. Gerdelman For For
1.6 Elect Director Kim C. Goodman For For
1.7 Elect Director David L. House Against For
1.8 Elect Director L. William Krause Against For
1.9 Elect Director David E. Roberson Against For
1.10 Elect Director Sanjay Vaswani Against For
2 Ratify Named Executive Officers’ Compensation Against Against
3 Amend Qualified Employee Stock Purchase Plan For For
4 Adopt Exclusive Forum Jurisdiction  Against For
5 Ratify KPMG LLP as Auditors For For

SharkRepellent.netBRCD: Issues for Future Proposals

Looking at SharkRepellent.net for provisions unfriendly to shareowners:

  • Proxy access provision whereby a shareholder or group of no more than 30 stockholders holding 3% or more of the outstanding common stock continuously for at least three (3) years may nominate directors, so long as the number of directors elected via proxy access does not exceed two individuals or 20% of the board. BRCD agreed to these terms to get me to withdraw my proposal this year.
  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • No action can be taken without a meeting by written consent.

BRCD: Mark Your Calendar

In order for a shareholder proposal to be included in our proxy statement and form of proxy relating to our 2017 Annual Meeting of Shareholders pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the proposal must be received by us no later than October 29, 2016.

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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