Cognizant Technology Solutions Corporation (CTSH) provides information technology (IT), consulting, and business process services worldwide. Their annual meeting is coming up on June 15, 2016.
ProxyDemocracy.org had collected the votes of three fund families when I checked. Vote AGAINST pay, committee; FOR proposal to allow written consent. I voted with the Board’s recommendations 57% 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.
Cognizant Technology: ISS Rating
From Yahoo! Finance: Cognizant Technology Solutions Corporation’s ISS Governance QuickScore as of Jun 1, 2016 is 7. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 8; 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: Shareholder Rights and Compensation.
Cognizant Technology: Compensation
Cognizant Technology’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Francisco D’Souza at $12.0M. I’m using Yahoo! Finance to determine market cap ($37.0B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Cognizant Technology 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 over that amount. Cognizant Technology’s shares outperformed the NASDAQ over the most recent two and ten year time periods, but underperformed during the most recent one and five year periods.
The MSCI GMIAnalyst report I reviewed gave Cognizant Technology 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 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 wealth creation in comparison to other widely held issuers. “Superior” is the rating given. On the actual compensation advisory vote, Egan-Jones concludes:
We believe that shareholders should 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 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.
Taking all of the above into accounted, I voted ‘AGAINST’ the pay package and, as is my custom, I voted against members of the compensation committee: John N. Fox, Jr., John E. Klein, Michael Patsalos-Fox, Robert E. Weissman.
Cognizant Technology: 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.
Cognizant Technology: Board Proposals
As mentioned above, I voted against the pay package and members of the compensation committee.
Cognizant Technology: Shareholder Proposals
#4 Provide Right to Act by Written Consent, submitted by me, 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 #4 FOR.
From the Egan-Jones Proxy Services report:
A shareholder right to act by written consent is one method to equalize the limited provisions for shareholders to call a special meeting. Delaware law allows 10% of shareholders to call a special meeting without mandating a holding period. However it takes 25% of Cognizant shareholders, from only those shareholders with at least one-year of continuous stock ownership, to call a special meeting.
Thus potentially 50% of Cognizant shareholders could be disenfranchised from having any voice whatsoever in calling a special meeting due to the Cognizant one-year lock-out period. The average holding period for stock is less than one-year according to “Stock Market Investors Have Become Absurdly Impatient.” …
Providing shareholders a right to act by written consent, in limited instances such as where the charter averts the removal of directors without cause, the right to act by written consent may be used to replace up to the entire board of directors. Board members have voiced their concerns, that the so-called written consent actions might limit the board’s decision making abilities in serious issues, according to the “Corporate Governance Report.” Also, allowing stockholder action by written consent would leave the company and its stockholders vulnerable to small groups of activist investors who do not owe fiduciary duties to the company.
In the recent study of Sullivan & Cromwell LLP, one of the most successful and controversial developments in the shareholder proposal area has been the increased rate, and success levels, of shareholder proposals requesting that the company grant shareholders the right to act by written consent . Some shareholders do believe that having the right to act by written consent permits shareholders to take action on important issues on the Company’s corporate governance practices…
We have determined that it is a positive corporate governance measure to allow the stockholders to have the ability to take action by written consent, if such written consent or consents sets forth the action to be taken and is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the matter were present and voted. As such, we recommend a vote “FOR” this Proposal.
Cognizant Technology: 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), Colorado PERA (PERA), and Teacher Retirement System of Texas (TRS), which voted all items on the proxy “FOR.”
| # | PROPOSAL TEXT | CorpGov | CBIS | TRILLIUM | CALVERT | CPPIB/PERA/TRS |
|---|---|---|---|---|---|---|
| 1a | Elect Director Zein Abdalla | For | For | Against | For | For |
| 1b | Elect Director Maureen Breakiron-Evans | For | For | Against | For | For |
| 1c | Elect Director Jonathan Chadwick | For | For | Against | For | For |
| 1d | Elect Director Francisco D’Souza | For | For | Against | For | For |
| 1e | Elect Director John N. Fox, Jr. | Against | For | Against | For | For |
| 1f | Elect Director John E. Klein | Against | For | Against | For | For |
| 1g | Elect Director Leo S. Mackay, Jr. | For | For | Against | For | For |
| 1h | Elect Director Lakshmi Narayanan | For | For | Against | For | For |
| 1i | Elect Director Michael Patsalos-Fox | Against | For | Against | For | For |
| 1j | Elect Director Robert E. Weissman | Against | For | Against | For | For |
| 1k | Elect Director Thomas M. Wendel | For | For | Against | For | For |
| 2 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For | Against | For | For |
| 3 | Ratify PricewaterhouseCoopers LLP as Auditors | For | Against | For | For | For |
| 4 | Provide Right to Act by Written Consent | FOR | For | For | For | For |
Cognizant Technology: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.
- 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 25% of the board or two (2) individuals (whichever is greater).
Cognizant Technology: Mark Your Calendar
Any stockholder proposals submitted in accordance with Rule 14a-8 must be received at our principal executive offices no later than the close of business on December 30, 2016. Proposals should be addressed to our Secretary at our offices at Glenpointe Centre West, 500 Frank W. Burr Blvd., Teaneck, New Jersey 07666.
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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