Whole Foods Market, Inc. (WFM, $WFM) is a retailer of natural and organic foods and grocer. WFM is one of the stocks in my portfolio. Their annual meeting is on March 9, 2016. ProxyDemocracy.org had collected the votes of five funds when I checked. I voted FOR proxy access, pro-rata vesting of equities and a report on food waste. I voted with the Board’s recommendations 82% 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.
WFM: ISS Rating
From Yahoo! Finance: Whole Foods Market, Inc.’s ISS Governance QuickScore as of Feb 1, 2016 is 3. The pillar scores are Audit: 1; Board: 10; Shareholder Rights: 1; 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: Board and Compensation.
WFM’s Summary Compensation Table shows the highest paid named executive officer (NEO) was A.C. Gallo, Chief Operating Officer at $2M. I’m using Yahoo! Finance to determine market cap ($11B) and Wikipedia’s rule of thumb regarding classification. WFM is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.1 million in 2014, so pay is far below that. WFM shares underperformed the NASDAQ over the most recent one, two, five, and ten year time periods, often substantially.
The MSCI GMIAnalyst report I reviewed gave $WFM an overall grade of ‘C.’ According to the report:
- The CEO’s potential cash severance pay exceeds five times his or her annual pay, which occurs in only 4.1% of companies in the home market. Such excessive ‘golden parachute’ payments weaken the pay for performance linkage and enable pay for failure.
- Unvested equity awards partially or fully accelerate upon the CEO’s termination allowing 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, essential for investors to assess the rigor of incentive programs.
- 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.
Several SRI mutual funds voted against the pay plan because pay isn’t sufficiently tied to performance. Despite the issues above and underperformance, I voted in favor of the pay package.
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.
WFM: Board Proposals
As stated above, I voted in favor of the pay package. I also voted for the employee stock plan. I am very much in favor of substantive employee ownership at WFM and their whole team approach. Here’s what SRI funds wrote about their positive vote on this topic: “A vote FOR this proposal is warranted given that: The purchase price is reasonable; The shares reserved is relatively conservative; and The offer period is within the limits prescribed by Section 423 of the Internal Revenue Code.”
WFM: Shareholder Proposals
Proposal #5 Proxy Access (my proposal). Yes, in response to my proposals last year and the year before, WFM did adopt proxy access… but it is proxy access ‘lite’ (see Section 15 of amended bylaws, starting page 12). What we are seeking is real proxy access of the type worked out over almost a decade of negotiations with various parties at the SEC. The provisions adopted by the board limit shareholder groups seeking access to no more than 20 stockholders, whereas the SEC’s vacated Rule 14a-11, as well as policies of the Council of Institutional Investors place no such limit.
Likewise the provision in WFM’s bylaws prohibiting renomination of a proxy access candidate for 2 years if they only get 25% of the votes discourages low cost proxy access campaign’s that may take more than a year to take hold, as do most new types of shareholder proposals. Additionally, WFM’s bylaws limit shareholders to nominating 20%, rather than 25, of the board. These ‘lite’ features are compared below with CII’s policy paper Proxy Access: Best Practices.
1. Caps on Nominating Groups
CII policies and related public positions do not endorse limits or caps on the number of shareowners in the nominating group.
CII believes that shareowners should be allowed to aggregate their holdings in order to meet the ownership eligibility requirement to nominate directors. The ability to aggregate holdings is crucial to the effectiveness of proxy access—without it, a proxy access provision would not be viable.
We note that without the ability to aggregate holdings even CII’s largest members would be unlikely to meet a 3% ownership requirement to nominate directors. Our review of current research found that even if the 20 largest public pension funds were able to aggregate their shares they would not meet the 3% criteria at most of the companies examined.
CII’s position is generally consistent with the view of the SEC. In 2010, the SEC considered, but rejected imposing a cap on the permitted number of members in a nominating group. The SEC found that individual shareowners at most companies would not be able to meet the minimum threshold of 3% ownership for proxy access unless they could aggregate their shares with other shareowners.
2. Renomination Limitations
CII has publicly opposed restrictions on re-nominations when a nominee fails to receive a specific percentage of votes.
CII believes that since resubmission requirements aren’t applicable to management’s candidates, they shouldn’t apply to candidates suggested by shareowners.
CII’s position is generally consistent with the view of the SEC, which in 2010 considered, but rejected, imposing such restrictions. The SEC did not believe it was necessary or appropriate to include a limitation on the use of proxy access by nominating shareowners or groups that have previously used proxy access. The SEC also found that such a limitation would not facilitate shareowners’ traditional state law rights and would add unnecessary complexity.
3. Limitation of Nominees to 20%, Instead of 25%, of the Board
This provision of WFM’s current proxy access lite is potentially problematic if the Board shrinks or expands. Right now 20% of 11 board members yields 2 possible nominees, the same as 25% rounded down. If the Board were to reduce its numbers to 9 shareholders would only be able to nominate a single candidate, whereas 25% would still yield 2.
CII believes that it is important that shareowner nominees have meaningful representation on the board and that one director is insufficient to achieve that goal. Having at least two nominees helps ensure that the nominees, if elected, can serve on multiple committees and have greater opportunities to bring an independent perspective into board decisions.
In their opposition statement, Whole Foods writes: “We Have an Established Record of Best Governance Practices and are Responsive to Shareholders.” When I appealed the no-action proposal granted to Whole Foods’ in December 2004, they had won an argument with the SEC that my proposal could be kept off the proxy because it conflicted with their proposal that would have allowed ONE shareholder owning 9% of WFM stock for FIVE years to nominate ONE director. That is part of their record of “best governance practices.”
While their adopted bylaws are better than first proposed, they certainly don’t fall under the rubric of “best practices.”
#6 Pro-rata vesting of equities. I voted in favor of this proposal since it will help further align the interests of managers and shareholders.
#7 Report on Food Waste. I voted in favor of this proposal. I’m sure WFM has a lot. Hopefully, writing a report on it will encourage reduction and save money. A report could also point to better options regarding how to make use of food waste. For example, read Science Has Found a Brilliant New Use for Your Kitchen Scraps.
WFM: CorpGov Recommendations Below – Votes Against Board Position in Bold
I also checked Proxy Insight. In addition to the votes reported on ProxyDemocracy.org, they report Canada Pension Plan Investment Board (CPPIB) and Teacher Retirement System of Texas (TRS) both voted in favor of all items. CalSTRS did the same. I put them both in the same column below to save space.
WFM: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Proxy access provision whereby a shareholder, or a group of up to 20 shareholders, holding at least 3% of the outstanding common stock for at least three years may nominate one director, so long as the number of directors elected via proxy access does not exceed 20% of the board.
WFM: Mark Your Calendar
Pursuant to SEC Rule 14a-8, any proposal that a shareholder of the Company wishes to have considered in connection with the 2017 Annual Meeting of Shareholders must be submitted to the Corporate Secretary at our principal executive offices no later than September 23, 2016, and in accordance with related provisions of the Company’s current Bylaws.
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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