T. Rowe Price Group Inc (NASD:TROW, $TROW) is a financial services holding company. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 26, 2016. ProxyDemocracy.org had collected the votes of three funds when I checked. I voted AGAINST the pay plan, compensation committee and directors with no shares. I voted FOR the auditor and the shareholder proposal seeking a report on incongruities between policies and voting practices on climate change– voting with the Board’s recommendations 13% 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.
T. Rowe Price Group: ISS Rating
From Yahoo! Finance: T. Rowe Price Group, Inc.’s ISS Governance QuickScore as of Apr 1, 2016 is 8. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 6; Compensation: 9. 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, Shareholder Rights and Compensation.
T. Rowe Price Group: Compensation
T. Rowe Price Group‘s Summary Compensation Table (p. 38, why no linked index?) shows the highest paid named executive officer (NEO) was CEOJames A.C. Kennedy at $8.7M. I’m using Yahoo! Finance to determine market cap ($19B) and Wikipedia’s rule of thumb regarding classification. T. Rowe Price Group is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at mid-cap corporations was $410.3 million in 2014, so pay is well below that amount. T. Rowe Price Group shares underperformed the NASDAQ over the most recent one, two, five and ten year time periods. 
The MSCI GMIAnalyst report I reviewed gave the T. Rowe Price Group an overall grade of ‘C.’ 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.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures the T. Rowe Price Group‘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 the T. Rowe Price Group . 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.
Because of the issues noted above, including above median pay and underperformance, I voted against the pay plan and compensation committee members: Mark S. Bartlett, Mary K. Bush, H. Lawrence Culp, Jr., Dr. Freeman A. Hrabowski, III, Robert F. MacLellan, Olympia J. Snowe, Dwight S. Taylor, Anne Marie Whittemore and Alan D. Wilson.
T. Rowe Price Group: 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.
T. Rowe Price Group: 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.
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 the T. Rowe Price Group that means the following: Brian C. Rogers, Edward C. Bernard, and James A.C. Kennedy with 19, 17 and 20 years on the board but still owning no stock. However, James A.C. Kennedy is retiring.
T. Rowe Price Group: Shareholder Proposals
There is only one shareholder proposal on the T. Rowe Price Group proxy this year but it is a very innovative and important one filed by the Janet Axelrod 1997 Revocable Trust, co-filed by Dignity Health, Walden Asset Management, the Theodore L. Goudvis Trust, and Friends Fiduciary Corporation. In fact, I think this proposal is so important that I actually purchased shares in other funds so that I could introduce similar proposals. If we want companies to fully consider ESG issues, we need funds to do so first, since they are the major owners.
… Climate change risks and opportunities impact our decisions as an investment manager… Our investment decision processes include consideration of climate change risks and opportunities depending on the nature of the company and its underlying business. We regularly include such matters in our overall assessment of a particular company or of an industry when appropriate.
A detailed report explaining any incongruities between the companies stated policies is critical tool for investors to understand and control the risks posed by such incongruities. Because of this we recommend a vote “FOR” this Proposal.
Please vote in For proposal #4 to report on incongruities between policies and voting practices on climate change.
T. Rowe Price Group: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Texas Teachers Retirement System reported all votes in favor the board’s recommendations. It is early days for this proxy, so Proxy Insight had only one additional fund vote reported. Colorado PERA voted with management on all issues I’m reporting early because their are so many upcoming votes ahead. I need to move on to the next ones.
T. Rowe Price Group: CorpGov Recommendations Below – Votes Against Board Position in Bold
| # | PROPOSAL TEXT | CorpGov | CALVERT | CBIS | TRILLIUM |
|---|---|---|---|---|---|
| 1a | Elect Director Mark S. Bartlett | Against | For | For | For |
| 1b | Elect Director Edward C. Bernard | Against | For | For | For |
| 1c | Elect Director Mary K. Bush | Against | For | For | For |
| 1d | Elect Director H. Lawrence Culp, Jr. | Against | For | For | For |
| 1e | Elect Director Freeman A. Hrabowski, III | Against | For | For | For |
| 1f | Elect Director Robert F. MacLellan | Against | For | For | For |
| 1g | Elect Director Brian C. Rogers | Against | For | For | For |
| 1h | Elect Director Olympia J. Snowe | Against | For | For | For |
| 1i | Elect Director William J. Stromberg | For | For | For | For |
| 1j | Elect Director Dwight S. Taylor | Against | For | For | For |
| 1k | Elect Director Anne Marie Whittemore | Against | For | For | For |
| 1l | Elect Director Alan D. Wilson | Against | For | For | For |
| 2 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For | For | Against |
| 3 | Ratify KPMG LLP as Auditors | For | Against | Against | Against |
| 4 | Report on and Assess Proxy Voting Policies in Relation to Climate Change Position | For | For | For | For |
T. Rowe Price Group: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Unanimous written consent.
- Shareholders holding not less than 25% of the voting power may call special meetings.
- Supermajority vote requirement (66.67%) to amend certain charter provisions.
- 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. Stockholder Nominees who receive less than 25% of the vote are prohibited from being a Stockholder Nominee again for the next two annual meetings.
T. Rowe Price Group: Mark Your Calendar
Any stockholder who wishes to submit a proposal or nominate a director for consideration at the 2017 Annual Meeting and include that proposal or nomination in the 2017 proxy statement should send their proposal to T. Rowe Price Group, Inc., c/o Chief Legal Officer and Corporate Secretary, 100 East Pratt Street, Mail Code BA-1360, Baltimore, MD 21202 and comply with the notice and other requirements described below.
Proposals must be received no later than November 18, 2016, and satisfy the requirements under applicable SEC Rules (including SEC Rule 14a-8) to be included in the proxy statement and on the proxy card that will be used for solicitation of proxies by the Board for the 2017 Annual Meeting.
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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