Reed’s Inc. (REED), develops, manufactures, markets and sells fantastic natural non-alcoholic carbonated soft drinks and other confectionaries, such as Reed’s Ginger Brews; Virgil’s Root Beer, Cream Sodas, Dr. Better and Real Cola, including ZERO diet sodas; Culture Club Kombucha; China Colas; Reed’s Ginger candy and ice creams, and Sonoma Sparkler and other juice based products.
Their annual meeting is coming up on November 29, 2016. Unfortunately, the company is too small for ProxyDemocracy.org to follow, so no help there. However, I have been heavily involved with the Committee to Rescue Reed’s, so am intimately familiar with many of the issues. Vote FOR proxy access, split chair/CEO, forcing zombie directors to resign, all new board nominees and pay. Vote AGAINST Christopher J. Reed, Auditor, and Repricing options. I voted with the Board’s recommendations 55% of the time. View Proxy Statement; again, the company to small to pull up proxy 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.
Reed’s Inc: ISS Rating
From Yahoo Finance: ISS has not updated their rating of Reed’s Inc.
Reed’s Inc: Compensation
Reed’s Inc’s Summary Compensation Table (p. 28) shows the highest paid named executive officer (NEO) was Neal Cohane, SVP of Sales at $256,000. I’m using Yahoo! Finance to determine market cap ($59M) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Reed’s Inc is a small-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at small-cap corporations was $3M in 2014, so pay was well under that amount. Reed’s Inc shares underperformed the NASDAQ over the most recent one, two, and ten year time periods by as much as 140% but outperformed in the most recent five year time period.
The MSCI GMIAnalyst report I reviewed gave Reed’s Inc an overall grade of ‘Average.’
Unfortunately, the company appears to be too small for Egan-Jones Proxy Services to research. There have been many issue at Reed’s Inc but I do not believe the pay of NEOs is one of them. I voted FOR.
Reed’s Inc: Accounting
The company would be best served by bringing in a new auditor after seven years. The mostly new Board should begin with a clean slate. I have suspicions the auditor may have failed to alert shareholders to various issues. Length of service is often correlated with going along with management, rather than reporting objectively. After seven years, it is time Reed’s Inc. engaged a different auditor, reporting directly to a more fully independent audit committee (although all still picked by the CEO). I voted AGAINST
Reed’s Inc: Board Proposals
I voted WITHHOLD for Chris Reed but voted FOR all other nominees. Reed’s Inc would function better without either Mr. Reed or his wife on the Board. With insiders (primarily the Reeds) holding more than thirty percent of the company’s stock and being founder/CEO, Mr. Reed will continue to have considerable influence with all the directors, especially since he appears to have handpicked each one. His presence on the Board would result in a greater chance of his continued domination and mismanagement of the Company.
As mentioned above, I voted “For” the pay package, most board nominees, “AGAINST’ Chris Reed and the auditor. I also voted “AGAINST” repricing previously issued stock options. Options should not retroactively be repriced. Those options were granted to incentivize performance. Performance goals were not met. Repricing options would simply reward failure.
I voted “For” what the proxy card is calling “Amend Bylaws on Advance Notice Provisions.” I have no idea who cam up with that title. If you look at Appendix B on the proxy, it is clear the amendment pertain to the nomination of directors and would require each nominee to submit “a statement” concerning “whether such person, if elected, intends to tender, promptly following such person’s election or re-election, an irrevocable resignation effective upon such person’s failure” to obtain a majority vote. Although, I believe the intent is to secure a resignation from all directors that fail to obtain a majority vote, the bylaw actually only requires a statement of their intent, which apparently could be one way or the other. During this past year, I sent the Company links to several articles on majority voting requirements and even some suggested wording. The proposed amendments are so muddled as to be practically useless. At least the Board’s intent is clearer in their recommendation of proposal 4. I will vote “For” and will make another attempt to get better language, which should also include a carveout so that proxy contests are decided by a plurality vote. See a discussion on the topic by the Council of Institutional Investors.
Company: Shareholder Proposals
Vote FOR the shareholder proposal by a member of the Committee (Mathew Tekulsky) to require an independent board chairman going forward. Directors are elected by shareholders to evaluate, hire, and fire the CEO. Having the CEO also be the Chairman of the Board creates a conflict of interest. Research cited by the proponent in his proxy argument finds that companies with an independent chair provide investors with five-year shareholder returns nearly 28 percent higher than those headed by a party of one. Don’t shareholders at Reed’s Inc want higher returns?
- Vote FOR the shareholder proposal by a member of the Committee (James McRitchie) on proxy access. Many companies already have proxy access bylaws allowing long-term shareholders with at least 3% of the company’s common stock to place at least two nominees directly on the proxy. Nothing makes directors more accountable to shareholders than knowing they can not only be voted off the Board but also can be replaced
with directors of the shareholders’ own choosing. Directors tend to work hardest for those who bring them to the board. Each of the current directors and those on this Proxy were chosen by the current Founder/CEO/Board Chairman. Proxy access would provide an opportunity for shareholders to have the names of two nominees placed on the proxy ballot without having to go through an expensive proxy contest. Shareholders would then have an opportunity to vote FOR or AGAINST any such candidates, after comparing them with candidates nominated by the Board. A CFA Institute cost-benefit analysis, found proxy access would benefit markets and boardrooms, with “little cost or disruption,” raising market capitalization by up to $140.3 billion. Public Versus Private Provision of Governance found a 0.5% average shareholder value increase for proxy access targeted firms. Again, don’t shareholders at Reed’s Inc want higher returns?
CorpGov Recommendations: Votes Against Board Position in Bold
I am voting early this time because the Reed’s Inc Board is apparently giving its shareowners as little time as possible to vote. Proxy Insight had reported no additional votes but may do so within the next week or so. Maybe I will come back later with an update
Elect Christopher J. Reed
|Elect John Bello|
Elect Stephan Freeman
Elect Lewis Jaffe
Elect Charles F. Cargile
Ratify Auditor for 2017 Fiscal Year
Advisory Vote to Ratify Named Executive Officers’ Compensation
Approve Repricing Previously Issued Stock Options
Amend Bylaws on Advance Notice Provisions (really zombie directors resign)
Shareholder Proposal Entitled “Independent Board Chairman”
Shareholder Proposal Entitled “Shareholder Proxy Access”
Reed’s Inc: Interesting Revelations in the 2016 Proxy
- Page 9: “Other than Director Dan Muffoletto, who has indicated that he does not support certain of the board’s nominees, no director has informed the Company in writing that he or she intends to oppose any action intended to be taken by the Company at the Annual Meeting.”
I wonder which board nominee(s) Mr. Muffoletto opposes? Perhaps we will find out at the annual meeting. Although I recommended AGAINST Mr. Muffoletto in prior years, he was the only director I met at annual meetings (aside from Mr. Reed) and was the only one who appeared responsive to suggestions for possible improvements in corporate governance. From prior year votes it is clear Mr. Reed voted against Muffoletto. Since Reed seems to have had total control over the Board, apparently even summarily dismissing a director without so much as a Board meeting, it is surprising Muffoletto has lasted as long as he has. My sense is that Muffoletto’s unconventional approach and knowledge were an overall positive influence.
- Page 12: If my interaction with Mr. Reed is indicative of the rest of the “BACKGROUND OF THE SOLICITATION,” I would retitle that section “Fantasies.”
- Page 13: “Election of either the board’s nominees or the Committee’s Nominees will represent a change of control of the Reed’s board. As a result, stock option grants to purchase 240,000 shares of common stock that are subject to the 2015 Incentive and Non-Statutory Stock Option Plan will be accelerated. These option are not subject to the re-pricing resolution set forth in this Proxy Statement and are currently priced above market value.”
- Page 13: “In addition, Reed’s term loan, line of credit and capital expansion loan with PMC Financial Services Group, LLC (“PMC”) in the aggregate amount of approximately $10.9 million are subject to the condition that PMC must approve any replacement of the President, Chief Executive Officer or Chief Financial Officer within 30 days. Otherwise, an event of default would be triggered under the loan documents.”
I’ve never seen anything quite like this in any other proxy. Reed’s Inc. here declares that election of their own nominees will represent a change in control, resulting in the acceleration of stock options. With legal interpretations like that, it is no wonder our stock is being diluted at every turn.
The second paragraph is also incredible. It appears Reed’s Inc is so much in debt that its creditor gets to approve officer replacements. Or maybe this is one of those deals one friend makes with another to ensure their job. If the provision was really driven by PMC, why just reserve approval of the CEO and CFO when the SVP of Sales makes more than either and the COO makes more than the CFO? If I were an investigative reporter, I’d look for personal links between PMC and the CFO. Have Lewis Jaffe or any of the board nominees looked into the terms and background of the contract?
- Page 20: In opposing proxy access, the Board notes the following: “We have an established record of best governance practices and are responsive to shareholders.”
Three of the four “best practices” listed are federal requirements. The fourth brag is for their “majority voting” standard, which fails to include a requirement that directors submit their resignation and fails to include a carveout for plurality voting in the case of contested elections. Reed’s Inc. has far from “best practices” in corporate governance.
- Page 21: “During the 2015 fiscal year, members of the board of directors met 14 times in various meetings. A majority of the directors and a majority of the independent directors attended all meetings. Each member of a committee of our board attended at least 75% of their respective committee meetings during the period of service.”
It would be interesting to learn how many times the board actually met face-to-face, instead of by telephone. Such meetings discourage side conversations and can mores easily be dominated by the Chairman.
- Page 23: “During 2016, the Company’s non-management directors, all of whom are considered to be “independent” as defined under the listing standards of the NYSE MKT and within the meaning of the Sarbanes Oxley Act of 2002, Section 301(3), were provided with the opportunity to meet in executive sessions of the board in which management directors and other members of management did not participate. At each audit committee meeting, the independent board members are afforded time to ask questions of the auditors and/or hold private discussions without the Company management present.”
Although they were provided the “opportunity to meet in executive session” did they actually do so, in compliance with NYSE rules? Section 303A.03 Executive Sessions includes the following requirement (my emphasis):
To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.
Reed’s Inc: Issues for Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners (unfortunately, SharRepellent does not yet cover Reed’s but this is what they might say if they did):
- No action can be taken without a meeting by written consent.
- No right of shareholders to call a special meeting.
- No shareholder right to proxy access.
- Supermajority vote requirement (80%) to amend certain charter provisions.
- No enforceable majority vote standard for directors.
- No carveout for plurality vote for directors in case of contested elections.
Reed’s Inc: Mark Your Calendar
If a stockholder wishes to present a proposal to be included in our proxy statement and form of proxy for the 2017 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC and namely, Securities Exchange Act Rule 14a-8. One of the requirements is that the proposal be received by our Secretary by no later than 120 calendar days before November 14, 2017- the anniversary date of this Proxy Statement was released to stockholders in connection with the 2016 Annual Meeting. If the date of next year’s annual meeting is changed by more than 30 days from the anniversary date of this year’s Annual Meeting on To be determined, then the deadline is a reasonable time before we begin to print and mail proxy materials. Proposals we receive after that date will not be included in the proxy statement for the 2017 Annual Meeting of Stockholders.
We urge stockholders to submit all proposals by Certified Mail – Return Receipt Requested. Stockholder proposals should be sent to 13000 South Spring Street, Los Angeles, California 90061, attention: Judy Holloway Reed, Secretary.
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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