Caterpillar Inc
Caterpillar Inc $CAT is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Their annual meeting is coming up on June 8, 2016.
ProxyDemocracy.org had collected the votes of two fund families when I checked. Vote AGAINST pay, committee, auditor; FOR all shareholder proposals – lobbying report, written consent, independent chairman. I voted with the Board’s recommendations 71% 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.
Caterpillar Inc: ISS Rating
From Yahoo! Finance: Caterpillar Inc’s ISS Governance QuickScore as of May 1, 2016 is 9. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 5; Compensation: 10. 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, Compensation.
Caterpillar Inc: Compensation
Caterpillar Inc’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO and Chair Douglas R. Overhelman at $15.8M. I’m using Yahoo! Finance to determine market cap ($42B) and am roughly defining large-cap as $10B, mid-cap as $2-10B, small-cap as less than $2B. Caterpillar 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 was considerably over that amount. Caterpillar Inc’s shares underperformed the S&P 500 over the most recent one, two, five and ten year periods. I’m beginning to think it is hopeless.
The MSCI GMIAnalyst report I reviewed gave Caterpillar Inc an overall grade of ‘F.’ 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.
- Changes in CEO pay do not appear to be aligned with the movement in the company’s share price performance over the previous five years. Significant payouts to executives in the absence of shareholder value creation may reflect poor incentive design
- 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 CEO’s annual incentives did not rise or fall in line with annual financial performance, reflecting a potential misalignment in the short-term incentive design.
Similarly, Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measures 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.
Taking into account the issues above, especially underperformance, I voted ‘AGAINST’ the pay package. I also followed my normal practice and EJ’s advice
We recommend that clients “WITHHOLD” votes from the members of the Compensation Committee, namely Independent outside directors David L. Calhoun, Jesse J. Greene, Jr., Debra L. Reed, and Miles D. White. 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.
Caterpillar Inc: Accounting
More than 25% of total audit fees were attributable to non-audit work. — so I voted ‘AGAINST’ because of a possible conflict of interest.
Caterpillar Inc: Board Proposals
As mentioned above, I voted against the pay package and members of the compensation committee.
Caterpillar Inc: Shareholder Proposals
#4 Report on Lobbying Payments and Policy, submitted by the Firefighters’ Pension System of the City of Kansas City, Missouri, Trust. Of course I voted ‘FOR.’ Justice Kennedy appears to have thought all this information was already reported to shareholders on a routine basis when he wrote the Citizens United decision.
With the advent of the Internet… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.
It is not. Here is our opportunity to get that right at Caterpillar. Vote #4 ‘FOR.’
#5 Provide Right to Act by Written Consent, submitted by me on behalf of my wife, Myra K. Young, so you can be I am voting ‘FOR.’ Allowing written 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 #5 FOR.
#6 Require Independent Board Chairman, submitted by John Chevedden. Everyone needs a boss, especially the CEO of a company that has underperformed the S&P 500 so consistently. The opposition argues the board has a ‘Presiding Director.’ Was Frank Sinatra known as the presiding director. Hell no! He was the Chairman of the Board… a title that really means something. Vote #6 ‘FOR.’
Caterpillar Inc: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to votes gathered by ProxyDemocracy.org, Proxy Insight had reported votes of Canada Pension Plan Investment Board (CPPIB), which voted all items on the proxy “FOR.”
| # | PROPOSAL TEXT | CorpGov | CBIS | TRILLIUM |
|---|---|---|---|---|
| 1.1 | Elect Director David L. Calhoun | Against | For | Against |
| 1.2 | Elect Director Daniel M. Dickinson | For | For | Against |
| 1.3 | Elect Director Juan Gallardo | For | For | Against |
| 1.4 | Elect Director Jesse J. Greene, Jr. | Against | For | Against |
| 1.5 | Elect Director Jon M. Huntsman, Jr. | For | For | Against |
| 1.6 | Elect Director Dennis A. Muilenburg | For | For | Against |
| 1.7 | Elect Director Douglas R. Oberhelman | For | For | Against |
| 1.8 | Elect Director William A. Osborn | For | For | Against |
| 1.9 | Elect Director Debra L. Reed | Against | For | Against |
| 1.10 | Elect Director Edward B. Rust, Jr. | For | For | Against |
| 1.11 | Elect Director Susan C. Schwab | For | For | Against |
| 1.12 | Elect Director Miles D. White | Against | For | Against |
| 2 | Ratify PricewaterhouseCoopers as Auditors | Against | Against | Against |
| 3 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For | Against |
| 4 | Report on Lobbying Payments and Policy | For | For | For |
| 5 | Provide Right to Act by Written Consent | For | For | For |
| 6 | Require Independent Board Chairman | For | For | For |
Caterpillar Inc: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Special meetings can only be called by shareholders holding not less than 25% of the voting power.
- No action can be taken without a meeting by written consent.
- Proxy access ‘lite’ provisions 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 up to 20% of the board or two directors, whichever is greater.
Caterpillar Inc: Mark Your Calendar
A proposal for action or the nomination of a director to be presented by any stockholder at the 2017 annual meeting of stockholders will be acted on only: If the proposal is to be included in our proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the proposal is received at the office of the Corporate Secretary on or before January 3, 2017…
In each case, your proposal or nomination must be delivered in the manner and accompanied by the information required in our bylaws. You may request a copy of the bylaws by writing to Caterpillar Inc. c/o Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629. They are also available on our website.
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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