DaVita HealthCare Partners Inc (NYSE:DVA), one of the companies in my portfolio, provides kidney dialysis services for patients suffering from chronic kidney failure or end stage renal disease. Their annual meeting is coming up on June 20, 2016. I have a proposal on the proxy to allow shareholders to act by written consent.
ProxyDemocracy.org had collected the votes of three fund families when I checked. Vote AGAINST pay, committee, and proxy access ‘lite’; FOR the right to act by written consent. I voted with the Board’s recommendations 53% 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.
DaVita HealthCare: ISS Rating
From Yahoo! Finance: DaVita HealthCare Partners Inc.’s ISS Governance QuickScore as of Jun 1, 2016 is 8. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 4; Compensation: 8. 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.
DaVita HealthCare: Compensation
DaVita HealthCare’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chairman Kent J. Thiry at $11.0M. I’m using Yahoo! Finance to determine market cap ($15.6B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. DaVita HealthCare 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 slightly over that amount and DaVita HealthCare is at the low end of large-caps. DaVita’s shares outperformed the S&P 500 over the most recent two, five and ten year time periods, but underperformed during the most recent one year period.
The MSCI GMIAnalyst report I reviewed gave DaVita HealthCare an overall grade of ‘C.’ 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. “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, 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 director Pamela M. Arway, Paul J. Diaz, Peter T. Grauer, and Roger J. Valine. 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.
DaVita HealthCare: 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.
DaVita HealthCare: Board Proposals
As mentioned above, I voted against the pay package and members of the compensation committee.
#4 Provide Proxy Access Right – At a quick glance I see DaVita HealthCare’s proposed proxy access provisions are ‘lite.’ Shareholders would only be able to nominate up to 20%, not 25% of the board and, more importantly, groups are limited to 20 members. CII reports that number is too low for their members to be effective. It does enhance shareholder rights but I’m torn because after it passes it will be harder to get shareholders to vote for a more robust form of proxy access. Egan-Jones and probably everyone else recommends ‘FOR,’ I’m voting ‘AGAINST.’
#5 Amend Qualified Employee Stock Purchase Plan – Egan-Jones recommends ‘FOR.” ”
An Employee Stock Purchase Plan or (ESPP) can be an important tool increasing ownership among company employees. In the US the tax advantages of a qualified plan are compelling, but qualifying for these tax benefits requires shareholder approval of the plan as well as several other structural elements, such as a minimum of 85% of fair market value as a minimum stock price and holding of the stock for a defined period of time. Egan-Jones supports the establishment of such qualified ESPPs unless there is a compelling example of prior abuse or significant reason to expect such abuse in the future.
I agree. Employees with a stake in the company can really add value. Vote ‘FOR.”
DaVita HealthCare: Shareholder Proposals
#6 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 #6 FOR. From Egan-Jones:
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.
DaVita HealthCare: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to votes gathered by ProxyDemocracy.org, Proxy Insight had reported votes of Teacher Retirement System of Texas (TRS), which voted all items on the proxy “FOR,” except voting against my proposal #6. Using the links at our Shareowner Action Handbook, I see that CalSTRS voted ‘FOR’ all items, including written consent.
| # | PROPOSAL TEXT | CorpGov | CALVERT /TRS | CBIS | FLORIDA SBA |
|---|---|---|---|---|---|
| 1a | Elect Director Pamela M. Arway | Against | For | For | For |
| 1b | Elect Director Charles G. Berg | For | For | For | For |
| 1c | Elect Director Carol Anthony (‘John’) Davidson | For | For | For | Against |
| 1d | Elect Director Barbara J. Desoer | For | For | For | For |
| 1e | Elect Director Paul J. Diaz | Against | For | For | For |
| 1f | Elect Director Peter T. Grauer | Against | For | For | For |
| 1g | Elect Director John M. Nehra | For | For | For | For |
| 1h | Elect Director William L. Roper | For | For | For | For |
| 1i | Elect Director Kent J. Thiry | For | For | For | For |
| 1j | Elect Director Roger J. Valine | Against | For | For | For |
| 2 | Ratify KPMG LLP as Auditors | For | For | Against | For |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For | For | Against |
| 4 | Provide Proxy Access Right | Against | For | For | For |
| 5 | Amend Qualified Employee Stock Purchase Plan | For | For | For | For |
| 6 | Provide Right to Act by Written Consent | For | Against | Against | For
|
DaVita HealthCare: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- No proxy access.
DaVita HealthCare: Mark Your Calendar
If you wish to present a proposal for action at the 2017 annual meeting of stockholders and wish to have it included in the proxy statement and form of proxy that management will prepare, you must notify us no later than January 11, 2017 in the form required under the rules and regulations promulgated by the SEC. Otherwise, your proposal will not be included in management’s proxy materials.
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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