United Technologies Corporation (NYSE:UTX, $UTX) provides high technology products and services to the building systems and aerospace industries across the world. It is one of the stocks in my portfolio. Their annual meeting is coming up on April 25, 2016. ProxyDemocracy.org had collected the votes of one fund when I checked. I voted AGAINST the pay plan, compensation committee and end to cumulative voting – voting with the Board’s recommendations 44% 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.
United Technologies Corporation: ISS Rating
From Yahoo! Finance: United Technologies Corporation’s ISS Governance QuickScore as of Apr 1, 2016 is 4. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 5; Compensation: 4. 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 and Compensation.
United Technologies Corporation: Compensation
United Technologies Corporation’s Summary Compensation Table (p. 57 Why no hyperlinked index?) shows the highest paid named executive officer (NEO) was Gregory Hayes, President and CEO at $10.5M. I’m using Yahoo! Finance to determine market cap ($86.3B) and Wikipedia’s rule of thumb regarding classification.United Technologies Corporation 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 about on par. United Technologies Corporation shares underperformed the S&P 500 over the most recent one, two and five year time periods but not over the most recent ten year period. 
The MSCI GMIAnalyst report I reviewed gave United Technologies Corporation 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.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures NCR Corporation’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 toUnited Technologies Corporation. 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.
Egan-Jones recommends that its clients vote against the members of the Compensation 
Committee, namely Independent outside directors John V. Faraci, Jean-Pierre Garnier, Edward A. Kangas, Harold Mcgraw III, Richard B. Myers, Brian C. Rogers and H. Patrick Swygert.
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.
They also note,
the CEO’s salary at $1,300,000 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 underperformance, I voted against the pay plan and the compensation committee: John V. Faraci, Jean-Pierre Garnier, Edward A. Kangas (who is also a director on 6 boards – problematic), Harold Mcgraw III, Richard B. Myers, Brian C. Rogers and H. Patrick Swygert.
United Technologies Corporation: Auditor
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
United Technologies Corporation: Board Proposals
As stated above, I voted against members of the compensation committee. I’m also concerned that over half the board has served for 10 years or more, although I’m glad to see two new appointments in the past year.
#3 Eliminate Cumulative Voting. Generally, I support cumulative voting, since it gives shareholders a better chance of at least getting some minimal representation on the board. Cumulative voting cannot result in a takeover, only influence. The board argues it is no longer relevant, since they have adopted proxy access. However, their proxy access is ‘lite,’ being limited to groups of 20. Egan-Jones recommends a vote against, as do several predisclosing funds but I’m voting For.
United Technologies Corporation: Shareholder Proposals
None this year. United Technologies Corporation could really use a proposal to amend their proxy access bylaws to make them workable by lifting that 20 member cap.
United Technologies Corporation: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported votes by Calvert, Teachers Retirement System of Texas (TRS), Canada Pension Plan Investment Board (CPPIB) and Colorado PERA. Calvert voted against eliminating cumulative voting. All the other votes, except Trillium, went as the board recommended. I see OTPP (Ontario Teachers Pension Plan) also voted with the board 100% of the time.
| NUM. | PROPOSAL TEXT | CorpGov | TRILLIUM |
|---|---|---|---|
| 1a | Elect Director John V. Faraci | Against | Against |
| 1b | Elect Director Jean-Pierre Garnier | Against | Against |
| 1c | Elect Director Gregory J. Hayes | For | Against |
| 1d | Elect Director Edward A. Kangas | Against | Against |
| 1e | Elect Director Ellen J. Kullman | For | Against |
| 1f | Elect Director Marshall O. Larsen | For | Against |
| 1g | Elect Director Harold McGraw, III | Against | Against |
| 1h | Elect Director Richard B. Myers | Against | Against |
| 1i | Elect Director Fredric G. Reynolds | For | Against |
| 1j | Elect Director Brian C. Rogers | Against | Against |
| 1k | Elect Director H. Patrick Swygert | Against | Against |
| 1l | Elect Director Andre Villeneuve | For | Against |
| 1m | Elect Director Christine Todd Whitman | For | Against |
| 2 | Ratify PricewaterhouseCoopers LLP as Auditors | For | For |
| 3 | Eliminate Cumulative Voting | Against | For |
| 4 | Ratify Named Executive Officers’ Compensation | Against | Against |
United Technologies Corporation: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- 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 include director nominees constituting up to 20% of the Board in the Company’s proxy materials. [Proxy access ‘lite’ and really in name only, since cap of 20 makes it unworkable.]
- Shareholders cannot call special meetings.
- Supermajority vote requirement (80%) to amend certain charter provisions.
United Technologies Corporation: Mark Your Calendar
In order for a shareowner proposal to be considered for inclusion in UTC’s Proxy Statement for the 2017 Annual Meeting under SEC Rule 14a-8, our Corporate Secretary must receive such proposal in writing by November 15, 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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