Kellogg Company (NYSE:K, $K) manufactures and markets ready-to-eat cereal and convenience foods. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 29, 2016. ProxyDemocracy.org had collected the votes of three funds when I checked. Vote FOR all items in the proxy, including shareholder proposal to adopt a simple majority standard for all votes. I voted with the Board’s recommendations 75% 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.
Kellogg Company: ISS Rating
From Yahoo! Finance: Kellogg Company’s ISS Governance QuickScore as of Apr 1, 2016 is 8. The pillar scores are Audit: 2; Board: 2; Shareholder Rights: 10; 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.
Kellogg Company: Compensation
Kellogg Company‘s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair John Bryant at $9.9M. I’m using Yahoo! Finance to determine market cap ($27.3B) and Wikipedia’s rule of thumb regarding classification. The Kellogg Company 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 slightly below that amount. Kellogg Company‘s shares outperformed the S&P 500 over the most recent one and two year time periods, underperforming or matching during the most recent five year and ten year periods.
The MSCI GMIAnalyst report I reviewed gave Kellogg Company an overall grade of ‘D.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 89% of companies in the home market. 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, 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 Kellogg Company’s wealth creation in comparison to other widely held issuers. “Good” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:
We believe that shareholders should 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 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 enhanc
ement of shareholder value. Therefore, we recommend a vote “FOR” this Proposal…
Our qualitative review of this Company’s compensation has identified one minor issue: the CEO’s salary at $1,200,004 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.
ement of shareholder value.Despite the issues noted above, I voted For the pay package.
Kellogg Company: 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.
Kellogg Company: Board Proposals
Egan-Jones recommended in favor of all directors. I voted For all.
Kellogg Company: Shareholder Proposals
Egan-Jones recommends for the shareholder proposal to transition to an independent director but against the rest.
Item #4, Animal Welfare Improvements in the Company’s Supply Chain. EJ recommends against; yes, it is a bit of clutter on the ballot but lI’m voting For. This proposal is nothing but a little bit of fun and sunshine. “RESOLVED, that shareholders applaud Kellogg- via this complimentary resolution- for its decision improve animal welfare in its supply system by switching to cage-free eggs.” The board also recommends a “For” vote. Let’s give them a hand for making the switch.
Item #5, Adopt Simple Majority Vote, This is my proposal to eliminate supermajority requirements. It is plain and simple good governance to not allow a minority to thwart the will of the majority. Vote For. EJ also recommends a vote in favor. This proposal topic won greater than majority support from independent Kellogg shareholders at 4 of our annual meetings since 2011. If the W.K. Kellogg Foundation sold a certain amount of its stock this proposal would receive a majority of all voting shares.
Kellogg Company: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported on Colorado PERA and Canada Pension Plan Investment Board (CPPIB), Colorado PERA and Teacher Retirement System of Texas. Like Calvert, reported below, they voted FOR all itms, including proxy proposals.
Kellogg Company: CorpGov Recommendations Below – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CALVERT | CBIS | TRILLIUM |
|---|---|---|---|---|---|
| 1.1 | Elect Director Mary Laschinger | For | For | For | Withhold |
| 1.2 | Elect Director Cynthia Hardin Milligan | For | For | For | Withhold |
| 1.3 | Elect Director Carolyn Tastad | For | For | For | Withhold |
| 1.4 | Elect Director Noel Wallace | For | For | For | Withhold |
| 2 | Ratify Named Executive Officers’ Compensation | For | For | For | Against |
| 3 | Ratify PricewaterhouseCoopers LLP as Auditors | For | For | Against | For |
| 4 | Express Support for Animal Welfare Improvements in the Company’s Supply Chain | For | For | For | For |
| 5 | Adopt Simple Majority Vote | For | For | For | For |
Kellogg Company: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Classified board with staggered terms.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to approve mergers not approved by a majority of continuing directors (66.67% to amend/repeal).
- 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. Nominees who receive less than 25% of the votes would be ineligible for nomination under the proxy access provision. Amendments needed to bring to vacated Rule 14a-11 standard.
Kellogg Company: Mark Your Calendar
Shareowner proposals submitted for inclusion in our proxy statement for the 2017 Annual Meeting of Shareowners must be received by us no later than November 10, 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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