International Business Machines: Proxy Score 21

International Business MachinesInternational Business Machines Corp. (NYSE:IBM, $IBM) provides information technology (IT) products and services worldwide. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 26, 2016. had collected the votes of four funds when I checked. I voted AGAINST the pay plan, and most of the directors. I voted FOR the report on lobbying, written consent, split CEO/Board Chair positions – voting with the Board’s recommendations 21% 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.

International Business Machines: ISS Rating

From Yahoo! Finance: International Business Machines Corporation’s ISS Governance QuickScore as of Apr 1, 2016 is 6. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 3; 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: Compensation.

International Business Machines: Compensation

International Business Machines’ Summary Compensation Table (p. 34) shows the highest paid named executive officer (NEO) was V.M. Rometty Chairman, President and CEO at $19.8M. I’m using Yahoo! Finance to determine market cap ($143.5B) and Wikipedia’s rule of thumb regarding classification. International Business Machines 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 above that amount. International Business Machines shares underperformed the S&P 500 over the most recent one, two and five year time periods but not over the most recent ten year period. GMIAnalyst

The MSCI GMIAnalyst report I reviewed gave International Business Machines an overall grade of ‘F’ According to the report:

  • 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 pays long-term incentives to executives without requiring the company to perform above the median of its peer group. Incentive plans that pay for mediocre performance undermine the linkage between pay and performance.
  • The CEO’s annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.
  • 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.

Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures NCR Corporation’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 International Business Machines. 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.

Egan-Jones recommends that its clients vote against the members of the Compensation Egan-JonesCommittee, namely Independent outside directors Alex Gorsky, Andrew N. Liveris, W. James McNerney, Jr., and Sidney Taurel.

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.

They also note,

the CEO’s salary at $1,550,000 exceeds the $1 million dollar deducibility limit imposed by section 162m for salaries and non-qualified incentive payments. Failure to abide by IRS 162m rules results in loss of deductibility for the compensation in question and possibly increased and unnecessary tax payments.

Because of the issues noted above, including above median pay and underperformance, I voted against the pay plan and the compensation committee: Alex Gorsky, Andrew N. Liveris, W. James McNerney, Jr., and Sidney Taurel.

International Business Machines: Auditor

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

International Business Machines: Board Proposals

As stated above, I voted against members of the compensation committee. I also voted against the following directors who, according to GMI Analyst, have served on the board for more than a year but own no stock in International Business Machines: Michael L. Eskew (also serves on 4 boards, arguably too many), Mark Fields, Alex Gorky, Shirley Ann Jackson (also serves on 4 boards, arguably too many), Andrew N. Liveris, W. James McNerney, Jr., Hutham S. Olayan, Virginia M. Roomette, and Peter R. Voser. I also voted against Kenneth I. Chenault, who also serves as the CEO/Chair of American Express and as a director at The Procter & Gamble Company. That doesn’t  have enough time to be an effective director at International Business Machines.

I voted in favor of amending the employee stock purchase plan. I am very much in favor of substantive employee ownership at NCR Corporation and incentivizing all employees. Egan-Jones Proxy Services‘  analysis includes the following conclusion:

An Employee Stock Purchase Plan or (ESPP) can be an important tool increasing ownership among company employees. In the US the tax advantages of a qualified plan are compelling, but qualifying for these tax benefits requires shareholder approval of the plan as well as several other structural elements, such as a minimum of 85% of fair market value as a minimum stock price and holding of the stock for a defined period of time. Egan-Jones supports the establishment of such qualified ESPPs unless there is a compelling example of prior abuse or significant reason to expect such abuse in the future.

We find no evidence of prior or expected future abuse of this ESPP and note that it appears to meet the requirements of a qualified plan. Thus we believe this ESPP to be in the best interests of shareholders, we recommend a vote “FOR” this Proposal.

Calvert writes:  “A vote FOR this proposal is warranted given that:- The purchase price is reasonable; and- The shares reserved is relatively conservative.”

I also voted in favor of declassifying the board for what feels like the umpteenth time. At the 2014 and 2015 Annual Meetings, the directors’ proposals that sought stockholder approval to eliminate the classification of the Board were approved by 78.43% and 77.01%  respectively but the bylaws require 80%. If my recollection is correct, all these votes stemmed from a proposal on the topic from my wife in 20013.

International Business Machines: Shareholder Proposals

I voted in favor of all three proxy proposals. Walden Asset Management submitted the proposal to report on lobbying expenses and policies. IBM’s statement on climate change policy states that “IBM recognizes climate change is a serious concern that warrants meaningful action on a global basis to stabilize the atmospheric concentration of greenhouse gases (GHGs).” In contrast, the US Chamber of Commerce, which IBM also supports, is publicly attacking the EPA on its new Clean Power Plan addressing climate change. IBM’s payments to the Chamber help fund these attacks and conflict with IBM’s positive climate goals. Shareholders need to know where the money is going. The opposition statement argues they already disclose enough. Egan-Jones agrees. I’m still hoping for more.

The proposals from John Chevedden and Kenneth Steiner to allow written consent and to move to a split chair/CEO are standard good governance proposals and should receive widespread support.  I voted for both. Written consent gives shareholders more options in an emergency situation. 

The Council of Institutional Investors, whose members invest over $3 trillion, clearly favors an independent chair in the following policy: “The board should be chaired by an independent director.”

A 2012 report by GMIRatings, The Costs of a Combined Chair/CEO, found companies with an independent chair provide investors with five-year shareholder returns nearly 28 percent higher than those headed by a party of one.

Still, the biggest reason to split the roles is to bring more accountability and oversight to the CEO’s job and to free the board to truly act as the CEO’s boss. Some argue a ‘lead director’ is enough. However, lead directors are not considered the equivalent of board chairmen by the board or shareowners, even when such directors are provided with comparable authorities. A recent EY report found titles matter. Lead directors typically cannot call shareholder or board meetings, nor to the lead CEO performance evaluations.

According to a Spencer Stewart survey of board members, 64% agree or strongly agree that splitting the positions results in more independent thought by directors, while 60% affirm that it leads to more effective CEO evaluations. ( See page 21.)

Proxy Insight

International Business Machines: CorpGov Recommendations Below – Votes Against Board Position in Bold

In addition to the votes reported on ProxyDemocracy.orgProxy Insight reported on Teachers Retirement System of Texas (TRS), which voted with management on all issues .

1.1Elect Director Kenneth I. ChenaultAgainstAgainstForAgainstFor
1.2Elect Director Michael L. EskewAgainstForForAgainstFor
1.3Elect Director David N. FarrForForForAgainstFor
1.4Elect Director Mark FieldsAgainstForForAgainstFor
1.5Elect Director Alex GorskyAgainstAgainstForAgainstFor
1.6Elect Director Shirley Ann JacksonAgainstForForAgainstFor
1.7Elect Director Andrew N. LiverisAgainstAgainstForAgainstFor
1.8Elect Director W. James McNerney, Jr.AgainstForForAgainstFor
1.9Elect Director Hutham S. OlayanAgainstForForAgainstFor
1.10Elect Director James W. OwensForForForAgainstFor
1.11Elect Director Virginia M. RomettyAgainstAgainstForAgainstFor
1.12Elect Director Joan E. SperoForForForAgainstFor
1.13Elect Director Sidney TaurelAgainstForForAgainstFor
1.14Elect Director Peter R. VoserAgainstForForAgainstFor
2Ratify PricewaterhouseCoopers LLP as AuditorsForForForForAgainst
3Ratify Named Executive Officers’ CompensationAgainstAgainstForAgainstFor
4Report on Lobbying Payments and PolicyForForForForFor
5Provide Right to Act by Written ConsentForForForForFor
6Require Independent Board ChairmanForForForForFor

International Business Machines: Issues for Future Proposals

Looking at for provisions unfriendly to shareowners:

  • Unanimous written consent (default New York state statute).
  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • No proxy access provisions.

International Business Machines: Mark Your Calendar

Stockholder proposals may be submitted for IBM’s 2017 proxy material after the 2016 Annual Meeting and must be received at our corporate headquarters no later than November 7, 2016. Proposals should be sent via registered, certified or express mail to: Office of the Secretary, International Business Machines Corporation, 1 New Orchard Road, Mail Drop 301, Armonk, NY 10504.

Management carefully considers all proposals and suggestions from stockholders. When adoption is clearly in the best interest of IBM and stockholders, and can be accomplished without stockholder approval, the proposal is implemented without inclusion in the Proxy Statement. Examples of stockholder proposals and suggestions that have been adopted over the years include stockholder ratification of the appointment of an independent registered public accounting firm, improved procedures involving dividend checks and stockholder publications, and changes or additions to the proxy materials concerning matters like abstentions from voting, appointment of alternative proxy, inclusion of a table of contents, proponent disclosure and secrecy of stockholder voting.


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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