Proto Labs

Proto Labs: Proxy Score 45

Proto LabsProto Labs Inc (NYSE:PRLB, $PRLB) is an online manufacturer of custom parts for prototyping and short-run production. Their annual meeting is coming up on May 19, 2016. had collected no votes when I checked. Vote AGAINST pay, stock plan, compensation committee members (Black, Gawlick, & Smith); Vote FOR my proxy access proposal. I voted with the Board’s recommendations 45% of the time. View Proxy Statement via iiWisdom.

Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.

Proto Labs: ISS Rating

From Yahoo! FinanceProto Labs, Inc.’s ISS Governance QuickScore as of May 1, 2016 is 1. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 1; 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: Board, and Compensation.

Proto Labs: Compensation

Proto Labs’ Summary Compensation Table (no links; page 25) shows the highest paid named executive officer (NEO) was CEO Victoria M. Holt at $1.9M. I’m using Yahoo! Finance to determine market cap ($1.6B) and Wikipedia’s rule of thumb regarding classification. JPMorgan is a small-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at small-cap corporations was $2.7M in 2014, so pay was under median. Proto Labs‘ shares outperformed the S&P 500 over the most recent five year time period but underperformed over the most recent one and two year periods.

The MSCI GMIAnalyst report I reviewed gave Proto Lab an overall grade of ‘B.’ According to the report:

  • Unvested equity awards partially or fully accelerate upon the CEO’s termination. 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’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO may weaken the ability of equity awards to align executives’ interests with long-term value creation.

Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures Proto Lab’s wealth creation in comparison to other widely held issuers. “Some Concerns” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:

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.

We recommend that clients “WITHHOLD” votes from the members of the Compensation Committee, namely Independent outside directors Archie C. Black, Rainer Gawlick and Brian K. Smith. 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.

Given the issues above, despite pay below median, I voted AGAINST the pay package, and the compensation committee.

Proto Labs: 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.

Proto Labs: Board Proposals

As mentioned above, I voted against the pay package and the compensation committee.

Egan-Jones Proxy Services did a lengthly analysis of the Omnibus Stock Plan and concluded:

After taking into account the maximum amount of shareholder equity dilution this proposal could cause [21.6%], as well as both the quantitative and qualitative measures outlined above, we believe that shareholders should not support the passage of this plan as proposed by the board of directors. We recommend the board seek to align CEO pay more closely with the performance of the company and work to reduce the cost of any similar plan that may be proposed in the future. Therefore, we recommend a vote “AGAINST” this Proposal.

I concurred and voted AGAINST.

Proto Labs: Shareholder Proposals

#5 Proxy Access. There is only one shareholder proposal on the proxy. It actually appears to be the first shareholder proposal Proto Labs has had on their proxy. The proposal is mine, so you can be sure I voted FOR. Key provisions include allowing an unrestricted group of shareholder owning 3% of common stock over at least 3 years to place nominees totaling up to one quarter of the directors then serving or two, whichever is greater. Proxy access is the most important shareholder right that has to be won through a proxy vote. I’ve been working on this issue since before filing a petition with the SEC in the summer of 2002, which the Council of Institutional Investors said reinvigorated the debate. If you vote only one item on the proxy, let it be FOR #5, proxy access.

Proto Labs: CorpGov Recommendations Below – Votes Against Board Position in Bold

Proxy InsightIn addition to the votes reported on (in this case none), Proxy Insight reported the votes of Texas Teachers (TRS), Canada Pension Plan Investment Board (CPPIB), and Colorado PERA. Colorado PERA voted FOR all items on the proxy, including proxy access. TRS and CPPIP voted FOR all items, except they voted AGAINST the Omnibus Stock Plan. I ended up voting as recommended by Egan-Jones Proxy Services.

1.1Elect Director Lawrence J. LukisFor
1.2Elect Director Victoria M. HoltFor
1.3Elect Director Archie C. BlackAgainst
1.4Elect Director Rainer GawlickAgainst
1.5Elect Director John B. GoodmanFor
1.6Elect Director Brian K. SmithAgainst
1.7Elect Director Sven A. WehrweinFor
2Ratify Ernst & Young LLP as AuditorsFor
3Ratify Named Executive Officers’ CompensationAgainst
4Amend Omnibus Stock PlanAgainst
5Proxy Access

Included in FocusLists Included in 1 FocusList: Proxy Access

Proto Labs: Issues for Future Proposals

Looking at for provisions unfriendly to shareowners:

  • Written consent requires unanimous consent.
  • No shareholder right to proxy access.

Proto Labs: Mark Your Calendar

Proposals of our shareholders that are intended to be presented by such shareholders at our fiscal 2016 Annual Meeting of Shareholders to be held in calendar 2017 and that shareholders desire to have included in our proxy materials related to such Annual Meeting must be received by us at our principal executive offices no later than 5:00 p.m. Central Time, December 9, 2016, which is 120 calendar days prior to the anniversary of this year’s mailing date. 


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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