Ford Motor Company (NYSE:F, $F) manufactures or distributes automobiles across six continents. It is one of the stocks in my portfolio. Their annual meeting is coming up on May 12, 2016. ProxyDemocracy.org had collected the votes of three funds when I checked. Vote AGAINST pay, compensation committee, poison pill; FOR shareholder proposals to transition out of dual class shares and to lower the threshold to call a special meeting. I voted with the Board’s recommendations 58% 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.
Ford Motor: ISS Rating
From Yahoo! Finance: Ford Motor Co.’s ISS Governance QuickScore as of May 1, 2016 is 9. The pillar scores are Audit: 2; Board: 7; Shareholder Rights: 9; Compensation: 7. 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.
Ford Motor: Compensation
Ford Motor’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Mark Fields at $18.6M. I’m using Yahoo! Finance to determine market cap ($53.5B) and Wikipedia’s rule of thumb regarding classification. Ford Motor 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 higher than that amount. Ford Motor’s shares underperformed the S&P 500 over the most recent one, two, and five year time periods, outperforming only over the last ten year time period. Although Ford Motor has done better in the last few months with good sales of SUVs and trucks, I don’t see any electric vehicle from Ford Motor wowing future customers. I may be reassessing my position.
The MSCI GMIAnalyst report I reviewed gave Ford Motor’s an overall grade of ‘F.’ 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.
- 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 American Express Company’s wealth creation in comparison to other widely held issuers. “Needs Attention” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:
Our qualitative review of this Company’s compensation has identified one minor issue: the CEO’s salary at $1,750,000 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…
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.
Given the issues above, including pay over median and underperformance, I voted Against the pay package and the compensation committee; Anthony F. Earley, Jr. (Chair), Jon M. Huntsman, Jr., Ellen R. Marram, John C. Lechleiter and John L. Thornton.
Ford Motor: 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.
Ford Motor: Board Proposals
As noted above, I voted against all members of the compensation committee.
#4 Amend Tax Benefits Preservation Plan (Poison Pill). EJ recommends for. I didn’t spend a lot of time analyzing this one but it appears to be a poison pill to keep the Ford family in control by ensuring a change in control will remove $15B of carry forward net operating losses. While I’m sure the measure will pass, since Ford Family shares have 16 times the voting power of our shares, I want to express my wishes in the strongest way possible that Ford Motor phase out its dual class share structure. Paying a little more in taxes wouldn’t hurt either. Vote AGAINST.
Ford Motor: Shareholder Proposals
EJ recommends FOR #5, AGAINST #6. I recommend voting FOR both proposals.
Item #5, Recapitalization Plan. This proposal by John Chevedden asks the to Board take steps to adopt a recapitalization plan for all of Ford’s outstanding stock to have one-vote per share. This would include all practicable steps including encouragement and negotiation with Ford family shareholders to request that they relinquish, for the common good of all shareholders, any preexisting rights to dual class shares. Controlled companies generally underperform non-controlled firms in terms of total shareholder returns, revenue growth, and return on equity, according to a report, Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk, commissioned by the Investor Responsibility Research Center Institute (IRRCi) and conducted by Institutional Shareholder Services Inc. (ISS).
In their opposition statement the board cites “robust corporate governance practices,” such as annual election of directors by majority vote, the right to call a special meeting, the right to act by written consent. Without one share one vote, these rights are simply an illusion, since the Ford Family has complete control. Vote FOR.
#6. Shareholders may call special meeting. This is a good governance measure submitted by me to reduce entrenchment. Allowing special meetings is associated with higher share values. See classic study by Gompers, Paul A. and Ishii, Joy L. and Metrick, Andrew, Corporate Governance and Equity Prices. 10% is a threshold that might actually be met in rare circumstances. The current threshold of 30% is not. Vote FOR.
Ford Motor: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported on Teacher Retirement System of Texas (TRS) and Canada Pension Plan Investment Board (CPPIB). Both voted ‘FOR’ all items on the proxy.
Ford Motor: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Action can be taken without a meeting by written consent.
- Special meetings can only be called by shareholders holding not less than 30% of the voting power.
- Ford Motor currently has a shareholder rights plan (poison pill) in force that will expire on 9-30-2018. The plan will also expire when the board determines that its NOLs are no longer available. The plan was subject to a binding shareholder vote at the company’s 5-13-2010 annual meeting where it was approved by shareholders. Had the plan not been approved, it would have expired. The company adopted the plan to protect the company’s ability to carry forward its net operating losses (NOLs). The company’s ability to use the NOLs would be significantly limited if the company experiences an “ownership change,” as defined under Section 382 of the Internal Revenue Code. On 9-12-2012, the company announced that it was extending the plan for three years, where the extension was subsequently approved by shareholders at the company’s 5-9-2013 annual meeting.
Ford Motor: Mark Your Calendar
Unless the Board of Directors determines otherwise, next year’s annual meeting will be held on May 11, 2017. Any shareholder proposal intended for inclusion in the proxy materials for the 2017 Annual Meeting must be received by the Company’s Secretary no later than December 1, 2016, and can be sent via facsimile to 313-248-8713. Shareholder proposals submitted outside of the process described in Rule 14a-8 of the Securities Exchange Act of 1934, as amended, will not be considered at any annual meeting of shareholders. The Company will not include in the Notice of Annual Meeting proposals not in compliance with SEC Rule 14a-8 and, under the Company’s By-Laws, no business other than that stated in the notice of meeting can be transacted at the 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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