H & R Block Inc (NYSE:HRB, $HRB) provides tax preparation and banking services and is one of the stocks in my portfolio. Their next annual meeting is September 8, 2016. ProxyDemocracy.org had collected the votes of one fund when I checked and voted but Proxy Insight had many more. I voted in favor of my suggested proxy access amendments to current bylaws and with the Board’s recommendations 64% of the time. View Proxy Statement.
HRB: ISS Rating
From ISS: HRB’s ISS Governance QuickScore as of August 1, 2015 is 4. The pillar scores are Audit: 2; Board: 1; Shareholder Rights: 8; Compensation: 1. Brought to you 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.
H & R Block’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO William C. Cobb at about $6.6M. I’m using Yahoo! Finance to determine market cap ($4.8B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B.. By those measures, HRB is a mid-cap company. According to the latest information I have from Equilar, the median CEO compensation at mid-cap corporations is about $5.3 million, so HRB’s pay is well above that. HRB’s shares underperformed the S&P 500 over the most recent one, two, five, and ten year periods. Note to self: Maybe it is time to consider other investment opportunities.
The GMIAnalyst report I reviewed gave HRB 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. Disclosure of performance metrics is 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 CEO’s total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
Because of the pay being substantially higher than median, poor performance and the concerns expressed by GMIAnalyst, I voted against the pay package. I also voted against members of the compensation committee because they recommended the pay package to the board: Bruce C. Rohde, Chair, David Baker Lewis, Tom D. Seip and James F. Wright.
I voted to ratify the auditor since I could not immediately see an apparent potential conflict of interest.
HRB: Board Proposals
HRB: Shareholder Proposals
I (James McRitchie) submitted proposed amendments to HRB’s proxy access bylaws. The current bylaws are like advertising a product as ‘natural,” which sounds good but has no legal meeting. HRB’s current proxy access bylaws will never be implemented because “activist” investors of the type that file proxy proposals and take other actions tend to not be the largest shareholders.
Vanguard, for example, may vote for a proxy access candidate, but I doubt they will initiate the process by nominating candidates, since they have never even filed a proxy proposal. It will probably take more than twenty shareholders to form a nominating group. The most important amendment requested in this proposal is removing the 20-member cap on those who can form a nominating group.
I withdrew my 2015 proxy access proposal when the board adopted a lite version (Proxy Access Lite: Victories at Whole Foods, H&R Block) and later submitted suggested amendments to make the bylaws better conform with CII’s Proxy Access: Best Practices, (August 2015, Council of Institutional Investors).
For the curious, take a look at the no-action decision from the SEC, which includes the request and rebuttals. Although some attorneys are viewing this as a turnaround or landmark decision, it is not. (see SEC Denial of No-Action Relief with Regard to 3/3 Proxy Access Proposal; H&R Block Denied Relief on Proposal to Amend Access Bylaws; SEC Staff Rejects No-Action Letter Request on Proposal to Revise Existing Proxy Access Bylaw.)
Most of the no-action decisions on proxy access proposals beginning on February 12 this year were decided by Staff based arguments asserted by companies without benefit of counter-arguments by proponents. The anomalous no-action letters issued on February 12 and subsequently provide no evidence why 3% of shares is considered an essential element to proxy access but having no cap on the number allowed to form a group is not. The decision by Staff discounting the negative impact of limiting nominating is probably not because Staff suddenly got some hare-brained notion. More likely, it is because corporate attorneys argued such limits were good and shareholders did not rebut that notion. Once shareholder’s start rebutting crazy arguments from management, expect industry standards to change, more closely matching CII’s Best Practices. We will soon see another example in the case of Microsoft.
There is a world of difference between a group of twenty, which research by the Council of Institutional Investors concludes cannot be reached by its members at most companies, and an unlimited group. One set of bylaws can actually be implemented; the other cannot. Proxy access bylaws that cannot be implemented serve no purpose other than to provide an illusion. Let’s get HRB out of the business of promoting illusions. Vote FOR proxy access.
Although ProxyDemocracy only had CBIS reporting, Proxy Insight showed voting results from Calvert, CalSTRS, CalPERS, British Columbia Investment Management Corporation (BCIMC), Colorado PERA, Teacher Retirement System of Texas. Every one of those funds voted ‘For’ all items on the proxy, including my proxy access proposal.
|1a||Elect Director Angela N. Archon||For||For|
|1b||Elect Director Paul J. Brown||For||For|
|1c||Elect Director William C. Cobb||For||For|
|1d||Elect Director Robert A. Gerard||For||For|
|1e||Elect Director Richard A. Johnson||For||For|
|1f||Elect Director David Baker Lewis||Against||For|
|1g||Elect Director Victoria J. Reich||For||For|
|1h||Elect Director Bruce C. Rohde||Against||For|
|1i||Elect Director Tom D. Seip||Against||For|
|1j||Elect Director Christianna Wood||For||For|
|1k||Elect Director James F. Wright||Against||For|
|2||Ratify Deloitte & Touche LLP as Auditors||For||Against|
|3||Ratify Named Executive Officers’ Compensation||Against||For|
HRB: 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 50.1% of the voting power.
- Supermajority vote requirement (66.67%) to approve mergers (default Missouri state statute).
- Proxy access lite provisions (to be removed if my suggested amendments are adopted):
- Limits nominating groups to 20 stockholders. Amendments would remove that restriction.
- 20% of the board limit, instead of 25%
- Requires 25% of the votes cast for proxy access candidates to be renominated for the next two (2) annual meetings. Amendments would remove that restriction.
HRB: Mark your Calendar
For a shareholder proposal to be considered for inclusion in the Company’s proxy statement for the 2017 annual meeting pursuant to Rule 14a-8 of the SEC, the Company must receive notice at our offices at One H&R Block Way, Kansas City, Missouri 64105, Attention: Corporate Secretary, on or before March 28, 2017. SEC rules and regulations govern the submission of shareholder proposals and our consideration of them for inclusion in next year’s proxy statement and form of proxy.
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.