Genomic Health Inc GHDX $GHDX, a healthcare company, provides actionable genomic information to personalize cancer treatment decisions in the United States and internationally. Their annual meeting is coming up on June 9, 2016.
ProxyDemocracy.org had collected the votes of one fund family when I checked. Vote AGAINST pay, compensation committee, stock plan; FOR proxy access. 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.
Genomic Health Inc: ISS Rating
From Yahoo! Finance: Genomic Health Inc’s ISS Governance QuickScore as of Jun 1, 2016 is 5. The pillar scores are Audit: 2; Board: 7; Shareholder Rights: 2; Compensation: 9. 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.
Genomic Health Inc: Compensation
Genomic Health Inc’s Summary Compensation Table (p. 19) shows the highest paid named executive officer (NEO) was Chief Business and Product Development Officer Frederic Pla at $2.1M. I’m using Yahoo! Finance to determine market cap ($908.9M) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Genomic Health 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 below that amount. Genomic Health’s shares outperformed the NASDAQ over the most recent one and ten year time periods, but underperformed during the most recent two and five year periods.
The MSCI GMIAnalyst report I reviewed gave Genomic Health an overall grade of ‘D.’ 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.
- 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.
- The company’s failure to establish and disclose specific standards regarding minimum equity retention standards for its CEO and directors may weaken the ability of equity awards to align executives’ interests with long-term value creation.
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 directors Felix J. Baker, Ph.D., Fred E. Cohen, M.D. and Henry J. Fuchs, M.D. 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.
Genomic Health Inc: 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.
Genomic Health Inc: Board Proposals
As mentioned above, I voted against the pay package and members of the compensation committee.
#2 Amend Omnibus Stock Plan. Egan-Jones Proxy Services writes, after taking into account the maximum amount of shareholder equity dilution this proposal could cause, 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 took their recommendation and voted ‘AGAINST.’
Genomic Health Inc: Shareholder Proposals
#5 Proxy Access. There is only one shareholder proposal on the 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, on the proxy. 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.
Directors are only really accountable to shareholders if they can be removed from the board and replaced with nominees of the shareowner’s choosing. Proxy Access in the United States: Revisiting the Proposed SEC Rule, a cost-benefit analysis by the Chartered Financial Analyst Institute found Proxy access would “benefit both the markets and corporate boardrooms, with little cost or disruption,” raising US market capitalization by up to $140 billion. If you vote only one item on the proxy, let it be FOR #5, proxy access.
Genomic Health Inc: CorpGov Recommendations Below – Votes Against Board Position in Bold
In addition to votes gathered by ProxyDemocracy.org, Proxy Insight had no additional reported votes but will probably soon post those of of Canada Pension Plan Investment Board (CPPIB), which voted with the board except against Cohen, the stock plan and FOR proxy access.
| # | PROPOSAL TEXT | CorpGov | CBIS |
|---|---|---|---|
| 1.1 | Elect Director Kimberly J. Popovits | For | Withhold |
| 1.2 | Elect Director Felix J. Baker | Withhold | Withhold |
| 1.3 | Elect Director Julian C. Baker | For | Withhold |
| 1.4 | Elect Director Fred E. Cohen | Withhold | Withhold |
| 1.5 | Elect Director Henry J. Fuchs | Withhold | Withhold |
| 1.6 | Elect Director Ginger L. Graham | For | Withhold |
| 1.7 | Elect Director Randall S. Livingston | For | Withhold |
| 2 | Amend Omnibus Stock Plan | Against | Against |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For |
| 4 | Ratify Ernst & Young LLP as Auditors | For | Against |
| 5 | Proxy Access Included in 1 FocusList: Proxy Access | For | For |
Genomic Health Inc: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Shareholders cannot call special meetings.
- No action can be taken without a meeting by written consent.
- Supermajority vote requirement (66.67%) to amend certain charter and all bylaw provisions.
- No proxy access.
Genomic Health Inc: Mark Your Calendar
If a stockholder wishes to present a proposal to be considered for inclusion in our proxy statement for the 2017 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC. One of the requirements is that the proposal be received by Genomic Health’s Secretary no later than December 31, 2016. Proposals we receive after that date will not be included in the proxy statement. We urge stockholders to submit proposals by Certified Mail—Return Receipt Requested.
Secretary, Genomic Health, Inc., 301 Penobscot Drive, Redwood City, California 94063
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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