Graphic from Bidnessetc.com
Gilead Sciences, Inc. (NASD:GILD, $GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines. It is one of the stocks in my portfolio. Their annual meeting is coming up on May 11,2016. ProxyDemocracy.org had collected the votes of three funds when I checked. Vote AGAINST pay, compensation committee, bonus plan. FOR proposal to allow shareholder action by written consent. I voted with the Board’s recommendations 46% 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.
Gilead Sciences, Inc: ISS Rating
From Yahoo! Finance: Gilead Sciences, Inc’sISS Governance QuickScore as of Apr 1, 2016 is 4. The pillar scores are Audit: 1; Board: 5; Shareholder Rights: 4; Compensation: 6. 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, Compensation.
Gilead Sciences, Inc: Compensation
Gilead Sciences, Inc’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair John C. Martin at $18.8M. I’m using Yahoo! Finance to determine market cap ($133B) and Wikipedia’s rule of thumb regarding classification. Gilead Sciences, Inc 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. Gilead Sciences, Inc‘s shares outperformed the S&P 500 over the most recent two, five and ten year time periods but not during the most recent one year period.
The MSCI GMIAnalyst report I reviewed gave Gilead Sciences, Inc an overall grade of ‘C.’ 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.
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 $1,727,423 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 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.
Given the issues above, including pay over median, I voted Against the pay package and the compensation committee: Kevin E. Lofton, John W. Madigan, Nicholas G. Moore and Per Wold-Olsen.
Gilead Sciences, Inc: 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.
Gilead Sciences, Inc: Board Proposals
Egan-Jones recommended in favor of all directors except members of the compensation committee. I concurred.
With regard to the Bonus Plan, despite EJ recommending in favor, I voted AGAINST. Only 18 employees eligible. I think they need to broaden and better align incentives. It is not just top executives who add value.
Gilead Sciences, Inc: Shareholder Proposals
The only shareholder proposal on the proxy is my proposal to allow shareholders to take action by written consent. This is a simple ‘good governance’ measure to reduce the likelihood of entrenchment. Allowing written consent 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. Vote For. This proposal won 53% as far back as 2012 at Gillead Sciences, Inc and still has not been implemented by the board.
Gilead Sciences, Inc: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Proxy Insight reported on Canada Pension Plan Investment Board (CPPIB) and Texas Teachers (TRS) which both voted FOR all items, including my proposal on written consent.
| NUM. | PROPOSAL TEXT | CorpGov | DOMINI | CALVERT | CPPIB/TRS | TRILLIUM |
|---|---|---|---|---|---|---|
| 1a | Elect Director John F. Cogan | For | For | For | For | Against |
| 1b | Elect Director Kevin E. Lofton | Against | For | For | For | Against |
| 1c | Elect Director John W. Madigan | Against | For | For | For | Against |
| 1d | Elect Director John C. Martin | For | Against | For | For | Against |
| 1e | Elect Director John F. Milligan | For | For | For | For | Against |
| 1f | Elect Director Nicholas G. Moore | Against | For | For | For | Against |
| 1g | Elect Director Richard J. Whitley | For | For | For | For | Against |
| 1h | Elect Director Gayle E. Wilson | For | For | For | For | Against |
| 1i | Elect Director Per Wold-Olsen | Against | For | For | For | Against |
| 2 | Ratify Ernst & Young LLP as Auditors | For | Against | Against | For | Against |
| 3 | Amend Executive Incentive Bonus Plan | Against | Against | For | For | For |
| 4 | Ratify Named Executive Officers’ Compensation | Against | Against | Against | For | Against |
| 5 | Provide Right to Act by Written Consent | For | For | For | For | For |
Gilead Sciences, Inc: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Special meetings can only be called by shareholders holding not less than 20% of the voting power.
- Proxy access ‘lite’ provision whereby a shareholder or group of no more than 20 stockholders holding at least 3% of the outstanding common stock continuously for at least three (3) years may nominate directors constituting up to the greater of two directors or 20% of the board.
Gilead Sciences, Inc: Mark Your Calendar
You may submit proposals for consideration at future stockholder meetings. For a stockholder proposal to be considered for inclusion in our proxy statement for the 2017 annual meeting of stockholders pursuant to SEC Rule 14a-8, the Corporate Secretary must receive the written proposal at our principal executive offices no later than November 28, 2016. Such proposals also must comply with SEC regulations under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company proxy materials. Proposals should be addressed to: Gilead Sciences, Inc., 333 Lakeside Drive, Foster City, California 94404
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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