KO – Proxy Voting Considerations
KO, The Coca-Cola Co (NYSE:KO) owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a range of still beverages, such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 27, 2016. ProxyDemocracy.org had collected the votes of zero funds when I checked. Vote AGAINST pay/bonus plans, compensation committee and directors owning no shares. Vote FOR Holy Land Principles and to Discontinue the release of unvested restricted stock awards – voting with the Board’s recommendations 52% 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.
KO: ISS Rating
From Yahoo! Finance: The Coca-Cola Company’s ISS Governance QuickScore as of Apr 1, 2016 is 8. The pillar scores are Audit: 2; Board: 7; Shareholder Rights: 3; Compensation: 10. 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.
KO: Compensation
KO’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Muhtar Kent at $14.6M. I’m using Yahoo! Finance to determine market cap ($200B) and Wikipedia’s rule of thumb regarding classification. KO 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. KO shares outperformed the S&P 500 over the most recent one, two and ten year time periods and underperformed during the most recent five year period. 
The MSCI GMIAnalyst report I reviewed gave KO 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 total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
- The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its directors may weaken the ability of equity awards to align directors’ interests with long-term value creation.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures 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. 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.
See also an analysis of pay by As You Sow.
Why did the cash bonus go up? Two features driving this bonus were added in 2015, profit before tax growth was weighted at 50% Net operating revenue was weighted at 25% and unit case volume at 25%. In the prior year this final category, essentially sales volume, had underperformed, as had EPS growth.
Because of the issues noted above, including above median pay, I voted against the pay plan and compensation committee: Maria Elena Lagomasino, Ronald W. Allen, Helene D. Gayle, and Alexis M. Herman.
KO: 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.
KO: Board Proposals
As stated above, I voted against members of the compensation committee. I was pleased to see 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.
Egan-Jones writes that for 2016, approximately 13,900 employees are eligible to participate in the Performance Incentive Plan. Their analysis of the executive incentive bonus plan concludes there is too much bonus, too little incentive:
After taking into account the maximum amount of shareholder equity dilution this proposal could cause, as well as both the quantitative and qualitative measures outlined above, we believe that shareholders should not support the passage of this plan as proposed by the board of directors. Excessive compensation packages have been an on-going cause of concern among shareholders and investors. We believe that the board should seek to define CEO and employee pay more clearly as well as link that pay with the performance of the company and work to reduce the potential cost of any similar plan that may be proposed in the future. Therefore, we recommend a vote “AGAINST” this Proposal.
I agree and voted Against.
As I have mentioned previously on many occasions, I like directors representing me to have skin in the game. If they own stock, they are more likely to look out for my interests as a shareholder. See evidence at Bhagat, Sanjai and Carey, Dennis C. and Elson, Charles M., Director Ownership, Corporate Performance, and Management Turnover. While options and unvested stock are better than nothing, I vote against directors that have served for over a year and still own no stock. At KO that means the following: David B. Weinberg, Marc J. Bolland, and Muhtar Kent.
KO: Shareholder Proposals
#5 Adopt Holy Land Principles. I voted in favor of having KO adopt Holy Land Principles. KO claims their operations in Palestine-Israel. essentially comply with these principles of nondiscrimination. If so, why not take a more public stand? Vote For.
#6 Discontinue the release of unvested restricted stock awards. This is the first time I’ve seen this proposal but it seems like another way to stop accelerated vesting, which I favor. Make them earn it; don’t just release unvested awards because of other events. Vote For.
#7 Report on Consistency Between Corporate Values and Political Contributions. This proposal from the National Center for Public Policy Research. I don’t often vote against a proposal based on who proposed it but for this right-wing organization, I make an exception. I don’t share their values. Yes, in 2014, KO contributed to the California Democratic Party. In 2015, members of that party tried to advance legislation to raise taxes on sugary drinks. Frankly, I wish the measure had succeeded and I wish KO would move much more substantially into a healthier product mix. Vote Against.
KO: CorpGov Recommendations Below – Votes Against Board Position in Bold
Proxy Insight reported on Canada Pension Plan Investment Board (CPPIB), Colorado PERA, and Teacher Retirement System of Texas (TRS). CPPIB and TRS voted with management on all issues. Colorado PERA voted against Barry Diller, abstained on Holy Land Principles, had no recorded vote on Shareholder Approval to Release of Unvested Restricted Stock Awards and voted against Report on Consistency Between Corporate Values and Political Contributions.
KO: CorpGov Recommendations Below – Votes Against Board Position in Bold
KO: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Special meetings can only be called by shareholders holding not less than 25% of the voting power.
- 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 directors constituting up to two individuals or 20% of the board (whichever is greater). The limitation of groups to 20 members makes KO’s proxy access provisions unworkable.
KO: Mark Your Calendar
Shareowners may present proper proposals for inclusion in our proxy statement and for consideration at the 2017 Annual Meeting of Shareowners by submitting their proposals in writing to the Company in a timely manner. Proposals should be addressed to the Office of the Secretary as specified in question 28. For a shareowner proposal other than a director nomination to be considered for inclusion in our proxy statement for our 2017 Annual Meeting of Shareowners, we must receive the written proposal on or before November 10, 2016. In addition, shareowner proposals must otherwise comply with the requirements of Rule 14a-8 promulgated under the 1934 Act.
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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