Halyard Health Inc (NYSE:HYH. $HYH) seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. The Company has two business segments: Surgical and Infection Prevention (S&IP) and Medical Devices. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 28, 2016. ProxyDemocracy.org had collected the votes of two funds when I checked. I voted AGAINST the pay plan, compensation committee, and Omnibus Stock Plan. I voted FOR the auditor, so with the Board’s recommendations 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.
Halyard Health: ISS Rating
From Yahoo! Finance: Halyard Health, Inc.’s ISS Governance QuickScore as of Apr 1, 2016 is 5. The pillar scores are Audit: 2; Board: 1; Shareholder Rights: 10; 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: Shareholder Rights.
Halyard Health: Compensation
Halyard Health‘s Summary Compensation Table shows the highest paid named executive officer (NEO) was Robert E. Abernathy, CEO/Chair at $5.6M. I’m using Yahoo! Finance to determine market cap ($1.5B) and Wikipedia’s rule of thumb regarding classification. Halyard Health is a small-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at small-cap corporations was $2.7M in 2014, so pay is well above that amount. Halyard Health‘s shares underperformed the S&P 500 over the most recent one and two year time periods. 
The MSCI GMIAnalyst report I reviewed gave Halyard Health an overall grade of ‘Average.’ It is too small to have the usual report.
Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures Halyard Health‘s wealth creation in comparison to other widely held issuers. “Needs attention” appears to be as low as they go. That’s the score they assigned to Halyard Health. On the actual compensation advisory vote, Egan-Jones concludes:
After taking into account both the quantitative and qualitative measures outlined above, we believe that shareholders cannot support the current compensation policies put in place by the Company’s directors. Furthermore, we believe that the Company’s compensation policies and procedures are not effective or strongly aligned with the long-term interest of its shareholders. Therefore, we recommend a vote “AGAINST” this Proposal.
Additionally, as noted by Trillium:
Research The CEO’s total compensation is greater than the median of its direct peers.The previous year’s restricted shares and stock options awarded to the CEO vest over less than five years.The CEO’s compensation is not linked to the company’s ESG performance.
Because of the issues noted above, including above median pay and underperformance, I voted against the pay plan and compensation committee up for election: John Byrnes, Maria Sainz and Julie Shimer.
Halyard Health: 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.
Halyard Health: Board Proposals
As stated above, I voted against members of the compensation committee. I am delighted that Egan-Jones Proxy Services also recommends voting against the compensation committee. From their report:
We recommend that clients “WITHHOLD” votes from the members of the Compensation Committee, namely Independent outside directors John Byrnes, Maria Sainz and Julie Shimer. Egan-Jones believes that the Compensation Committee should be held accountable for such a poor rating and should ensure that the Company’s compensation policies and procedures are centered on a competitive pay-for-performance culture, strongly aligned with the long-term interest of its shareholders and necessary to attract and retain experienced, highly qualified executives critical to the Company’s long-term success and the enhancement of shareholder value.
Egan-Jones recommends voting For the omnibus stock plan.
The shareholders are being asked to approve the material terms of the performance goals under the Plan in order to preserve the ability to continue to grant performance-based awards that meet the requirements for tax deductibility under Section 162(m) of the Internal Revenue Code. Shareholders are not being asked to approve any additional shares to be authorized for grant under the Plan.
I voted against the pay plan because it wasn’t properly incentivized. I think the same is true of the omnibus stock plan, so voted AGAINST it as well.
Halyard Health: Shareholder Proposals
None.
Halyard Health: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported the Canada Pension Plan Investment Board (CPPIB) and Colorado PERA voted with management on all issues, as did the Teachers Retirement System of Texas.
Halyard Health: CorpGov Recommendations Below – Votes Against Board Position in Bold
| # | PROPOSAL | MGMT | CBIS | TRILLIUM |
|---|---|---|---|---|
| 1a | Elect Director John P. Byrnes | Withhold | Withhold | Withhold |
| 1b | Elect Director Maria Sainz | Withhold | Withhold | Withhold |
| 1c | Elect Director Julie Shimer | Withhold | Withhold | Withhold |
| 2 | Ratify Deloitte & Touche LLP as Auditors | For | Against | For |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For | Against |
| 4 | Amend Omnibus Stock Plan | Against | Against | Against |
Halyard Health: 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.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to approve mergers.
- Supermajority vote requirement (80%) to amend certain charter and all bylaw provisions.
- No proxy access bylaw provisions.
Halyard Health: Mark Your Calendar
Proposals by stockholders for inclusion in our proxy statement and form of proxy pursuant to SEC Rule 14a-8 for the Annual Meeting of Stockholders to be held in 2017 should be addressed to the Corporate Secretary, Halyard Health, Inc. 5405 Windward Parkway, Suite 100 South, Alpharetta, GA 30004, and must be received at this address no later than November 11, 2016; provided that if the date of the 2017 Annual Meeting of Stockholders is more than 30 days before or after April 28, 2017 (the anniversary date of the 2016 Annual Meeting), the deadline will be a reasonable time before we begin to print and send our proxy materials to stockholders. Upon receipt of a proposal, we will determine whether or not to include the proposal in the proxy statement and form of proxy in accordance with applicable law. It is suggested that proposals be forwarded by certified mail, return receipt requested.
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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