TSCO, Tractor Supply Company is an operator of rural lifestyle retail stores in the United States catering to recreational farmers and ranchers, as well as tradesmen and small businesses. It is one of the stocks in my portfolio. Their annual meeting is coming up on May 3, 2016. ProxyDemocracy.org had collected the votes of three funds when I checked. I voted AGAINST R. Keith Halbert; FOR all other items in the proxy. I voted with the Board’s recommendations 88% 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.
TSCO: ISS Rating
From Yahoo! Finance: Tractor Supply Company’s ISS Governance QuickScore as of Apr 1, 2016 is 3. The pillar scores are Audit: 2; Board: 1; Shareholder Rights: 5; Compensation: 2. 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.
TSCO: Compensation
TSCO’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Gregory A. Sandfort at $6.6M. I’m using Yahoo! Finance to determine market cap ($12.6B) and Wikipedia’s rule of thumb regarding classification. TSCO is a large-cap company but barely. 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 lower than that amount. Shares outperformed the NASDAQ over the most recent one, two, five and ten year time periods.
The MSCI GMIAnalyst report I reviewed gave TSCO an overall grade of ‘B.’ 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 wealth creation in comparison to other widely held issuers and rates the company “Superior.” On the actual compensation advisory vote, Egan-Jones concludes:
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. Therefore, we recommend a vote “FOR” this Proposal.
I voted FOR the pay package.
TSCO: 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.
TSCO: Board Proposals
Egan-Jones recommended in favor of all board member/nominees. I mostly concurred but voted against R. Keith Halbert who has served on the board for a year but still owns no shares in TSCO. 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 Bhagat, Sanjai and Carey, Dennis C. and Elson, Charles M., Director Ownership, Corporate Performance, and Management Turnover.
TSCO: Shareholder Proposals
None
TSCO: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported on Colorado PERA, Canada Pension Plan Investment Board (CPPIB) and Teacher Retirement System of Texas (TRS). Each voted with the board, FOR each item.
| # | PROPOSAL TEXT | CorpGov | CALVERT | CBIS | TRILLIUM |
|---|---|---|---|---|---|
| 1.1 | Elect Director Cynthia T. Jamison | For | Withhold | Withhold | Withhold |
| 1.2 | Elect Director Johnston C. Adams | For | Withhold | Withhold | Withhold |
| 1.3 | Elect Director Peter D. Bewley | For | Withhold | Withhold | Withhold |
| 1.4 | Elect Director Keith R. Halbert | Withhold | Withhold | Withhold | Withhold |
| 1.5 | Elect Director George MacKenzie | For | Withhold | Withhold | Withhold |
| 1.6 | Elect Director Edna K. Morris | For | Withhold | Withhold | Withhold |
| 1.7 | Elect Director Mark J. Weikel | For | Withhold | Withhold | Withhold |
| 1.8 | Elect Director Gregory A. Sandfort | For | Withhold | Withhold | Withhold |
| 2 | Ratify Ernst & Young LLP as Auditors | For | For | Against | For |
| 3 | Ratify Named Executive Officers’ Compensation | For | Against | Against | Against |
TSCO: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Shareholders cannot call special meetings.
- Supermajority vote requirement (66.67%) to amend certain charter provisions.
- No proxy access.
TSCO: Mark Your Calendar
Shareholders who desire to submit to the Company proposals for possible inclusion in the Company’s proxy materials for the 2017 Annual Meeting of Shareholders must submit such proposals in writing by November 18, 2016 to the Corporate Secretary of the Company at 5401 Virginia Way, Brentwood, Tennessee 37027.
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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