UNP – Union Pacific ($UNP), operates through its principal operating company, Union Pacific Railroad Company. 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 two funds when I checked. Vote AGAINST pay, compensation committee; FOR both shareholder proposals: #4 execs to retain stock and #5 transition to an independent chair. I voted with the Board’s recommendations 47% 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.
UNP: ISS Rating
From Yahoo! Finance: Union Pacific Corporation’s ISS Governance QuickScore as of May 1, 2016 is 1. The pillar scores are Audit: 1; Board: 5; Shareholder Rights: 1; 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 and Compensation.
UNP: Compensation
UNP’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Lance M. Fritz at $10.1M. I’m using Yahoo! Finance to determine market cap ($72B) and Wikipedia’s rule of thumb regarding classification. UNP 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 about even at UNP. UNP’s shares underperformed the S&P 500 over the most recent one and two year time periods, outperforming over the last five and ten year time periods.
The MSCI GMIAnalyst report I reviewed gave UNP 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.
- 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 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:
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, I voted AGAINST the pay package and the compensation committee: Andrew H. Card, Jr., Erroll B. Davis, Jr., David B. Dillon, Steven R. Rogel and Jose H. Villarreal.
UNP: 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.
UNP: Board Proposals
As noted above, I voted against all members of the compensation committee. EJ gave compensation a ‘Needs Attention’ score by the board as a whole a score of ‘good.’
UNP: Shareholder Proposals
Item #4, Stock Retention. This proposal by me (James McRitchie) asks the board to require senior executives to retain a significant percentage of stock acquired through equity pay programs (75% of net after-tax share) until reaching normal retirement age.
In their opposition statement says in part, “there is a legitimate need for executives to be able to diversify their assets.” Their salaries alone are at least $400,000 a year. Then there are bonuses, pensions, etc. Don’t tell me they can’t afford to keep 75% of their stock acquired through equity pay programs locked up for a significant time. Vote FOR.
#5. Require an Independent Board Chairman. The proposal from John Chevedden seeks a move to a split chair/CEO with the next appointment. As the EJ analysis points out,
We believe that there is an inherent potential conflict, in having an Inside director serve as the Chairman of the board. Consequently, we prefer that companies separate the roles of the Chairman and CEO and that the Chairman be independent to further ensure board independence and accountability. We recommend a vote “FOR” this Proposal.
The CEO shouldn’t be their own boss. Vote FOR.
UNP: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to the votes reported on ProxyDemocracy.org, Australia’s Local Government Super, CPP Investment Board (Canada) and TRS (Teachers Retirement System of Texas) voted with the board, except they all voted FOR #5 independent chair.
| # | PROPOSAL TEXT | CorpGov | CBIS | TRILLIUM |
|---|---|---|---|---|
| 1.1 | Elect Director Andrew H. Card, Jr. | Against | For | Against |
| 1.2 | Elect Director Erroll B. Davis, Jr. | Against | For | Against |
| 1.3 | Elect Director David B. Dillon | Against | For | Against |
| 1.4 | Elect Director Lance M. Fritz | For | For | Against |
| 1.5 | Elect Director Charles C. Krulak | For | For | Against |
| 1.6 | Elect Director Jane H. Lute | For | For | Against |
| 1.7 | Elect Director Michael R. McCarthy | For | For | Against |
| 1.8 | Elect Director Michael W. McConnell | For | For | Against |
| 1.9 | Elect Director Thomas F. McLarty, III | For | For | Against |
| 1.10 | Elect Director Steven R. Rogel | Against | For | Against |
| 1.11 | Elect Director Jose H. Villarreal | Against | For | Against |
| 2 | Ratify Deloitte & Touche LLP as Auditors | For | Against | For |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For | Against |
| 4 | Stock Retention | For | For | Against |
| 5 | Require Independent Board Chairman | For | For | For |
UNP: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Unanimous written consent (default Utah state statute for companies incorporated before 7-1-1992).
- Utah law provides that shareholders holding not less than 10% of the voting power may call special meetings.
- 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 nominate one director, so long as the number of directors elected via proxy access shall not exceed the greater of two (2) or 20% of the board.
UNP: 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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