JNJ, Johnson&Johnson (NYSE: $JNJ) researches, develops, manufactures, and sells various products in the health care field worldwide through three segments: Consumer, Pharmaceutical, 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 & favoring share buybacks. Vote FOR independent chair, disclose lobbying and report on drug take-back programs. I voted with the Board’s recommendations 53% 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.
JNJ: ISS Rating
From Yahoo! Finance: Johnson & Johnson’s ISS Governance QuickScore as of Apr 1, 2016 is 2. The pillar scores are Audit: 2; Board: 2; Shareholder Rights: 4; Compensation: 1. 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.
JNJ: Compensation
JNJ‘s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Alex Gorsky at $23.8M. I’m using Yahoo! Finance to determine market cap ($306B) and Wikipedia’s rule of thumb regarding classification. JNJ is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.3M in 2014, so pay is well above that amount. JNJ‘s shares underperformed the S&P 500 over the most recent one, five and ten year time periods, underperforming during the most recent two year period. 
The MSCI GMIAnalyst report I reviewed gave JNJ an overall grade of ‘D.’ 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.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures Johnson&Johnson‘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 JNJ 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…
Our qualitative review of this Company’s compensation has identified one minor issue: the CEO’s salary at $1,613,462 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. While this issue is not sufficient to trigger a negative vote alone, it does impact the Company’s overall compensation score, we would recommend the board investigate and consider alternative means of compensation for the CEO and any other 162m covered NEOs who exceed this limit in the future.
Because of the issues noted above, including above median pay, I voted against the pay plan and compensation committee up for election: Charles Prince, William D. Perez, Ronald A. Williams and Affiliated outside director A. Eugene Washington
JNJ: 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.
JNJ: 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:
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.
JNJ: Shareholder Proposals
Egan-Jones recommends for the shareholder proposals to transition to an independent director but against the rest.
Item #4, Adopt and Issue General Payout Policy Regarding Share Repurchases, would give preference to stock repurchases over dividends. I think this would be the wrong move, providing an incentive for misadventure by management. Vote Against.
#5, Require Independent Board Chairman,was submitted by Kenneth Steiner, requesting a transition to split chair and CEO positions. This is simple good governance. I routinely submit almost the same exact proposal. Don’t be fooled, a ‘lead director’ is in no way equivalent to an independent chair. Vote For.
#6. Report on Lobbying Payments and Policy, submitted by the New York State Common Retirement Fund, asks for a report so that shareholders can know where the money is going. Vote For.
#7 Report on Policies for Safe Disposal of Prescription Drugs by Users, which comes from the Gun Denhart Living Trust, c/o As You Sow Foundation, simply requests a report on establishing safe disposition programs by users of prescription drugs to prevent water pollution. We obviously need action in the area. The report could help determine future industry-side legislation for take back programs. Vote For.
Johnson&Johnson: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported on Canada Pension Plan Investment Board (CPPIB), Colorado PERA and Teacher Retirement System of Texas (TRS). All voted with management on all issues except they voted FOR the proposal to move to an independent director.
JNJ: CorpGov Recommendations Below – Votes Against Board Position in Bold
JNJ: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Action can be taken without a meeting by written consent but must be unanimous (default New Jersey state statute), effectively negating the right.
- Special meetings can only be called by shareholders holding not less than 25% of the voting power.
- Supermajority vote requirement (66.67%) to approve mergers (default New Jersey state statute for companies organized prior to 1-1-1969).
- Proxy access provision, but limited to a group of up to 20 stockholders, holding at least 3% of the outstanding common stock for at least three years may include in the company’s proxy materials director nominees constituting up to the greater of two directors or 20% of the board. Amendments needed to bring to vacated Rule 14a-11 standard.
JNJ: Mark Your Calendar
To be included in the Proxy Statement and proxy card for the 2017 Annual Meeting of Shareholders, a shareholder proposal must be received at our principal office on or before November 16, 2016 and must comply with Rule 14a-8 under the U.S. Securities and Exchange Act of 1934, as amended.
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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