Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale.
Their annual meeting is coming up on January 26th, 2017. ProxyDemocracy.org had collected the votes of 3 fund families when I checked. I voted FOR proxy access and a report on sustainability and pay practices; AGAINST pay, compensation committee, auditor and financial expert. I voted with the Board’s recommendations 33% of the time. View Proxy Statement. See 1/25/2017 update.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Walgreens Boots Alliance: ISS Rating
From Yahoo Finance: Walgreens Boots Alliance, Inc.’s ISS Governance QualityScore as of January 2, 2017 is 1. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 1; Compensation: 1. 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.
Walgreens Boots Alliance: Compensation
Walgreens Boots Alliance, Inc.’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Stefano Pessina at $10.1M. I’m using Yahoo! Finance to determine market cap ($90.48B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Walgreens Boots Alliance 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 2015, so pay was close to median. Walgreens Boots Alliance shares outperformed the S&P 500 over the most recent five and ten year time periods but underperformed in the most recent one and two year time periods.
The MSCI GMIAnalyst report I reviewed gave Walgreens Boots Alliance an overall grade of ‘C.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 85% of companies in the home market. 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. While a majority 91% of companies in the home market have not disclosed these targets, disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
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 compensation issues. Egan-Jones concludes:
the Company earns a compensation score of “Needs Attention” and the Company’s Cash Bonus/Incentive Plan earns an “AGAINST” recommendation due to its dilutive effect to the interests of the shareholders, as such, we recommend that clients “WITHHOLD” votes from the members of the Compensation Committee, namely Independent outside directors Nancy M. Schlichting, William C. Foote, John A. Lederer and Leonard D. Schaeffer. 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. Moreover, Egan-Jones believes that the Compensation Committee should be held accountable for such disapproval and that the board as a whole should seek to align CEO and employee pay more clearly as well as link that pay with the performance of the company, and work to reduce the potential cost of any similar plan that may be proposed in the future.
Given the factors listed by GMIAnalyst, the company’s recent inability to outperform the market and the recommendation Egan Jones, I voted “AGAINT” the say-on-pay item and voted against the members of the Compensation Committee.
Walgreens Boots Alliance: Accounting
As noted by Egan-Jones, “while we are concerned about the below issues in the disciplinary record of this auditor, we do not believe that they have risen to the level that this auditor’s integrity, professionalism or independence is in question.” They recommend voting For. However, I see Colorado PERA voted against the auditor and the financial expert on that committee, Janice M. Babiak. Since I very much respect Lynn Turner who tells me PCAOB inspection reports are finding 25-40% of the time audits do not meet professional standards. Yet, funds keep voting to keep these substandard audits.
I joined with Colorado PERA in voting AGAINST Babiak and the auditor.
Walgreens Boots Alliance: Board Proposals
As mentioned above, I voted “AGAINST” the pay package, members of the compensation committee, the financial expert on the audit committee and the auditor. On item 4, Egan Jones summarized their recommendation as follows:
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 below, we believe that shareholders should not support the passage of this plan as proposed by the board of directors. Excessive compensation packages have been an on-going cause of concern among shareholders and investors. We believe that the board should seek to define CEO and employee pay more clearly as well as link that pay with the performance of the company and work to reduce the potential cost of any similar plan that may be proposed in the future. Therefore, we recommend a vote “AGAINST” this Proposal.
I voted with the Egan Jones recommendation, AGAINST.
Walgreens Boots Alliance: Shareholder Proposals
#5 Proxy Access – The proposal is John Chevedden’s. I voted ‘FOR.’ While the proposal seeks a number of amendments to reach ‘best practices’ standards, the most important involves raising the group limit for making nominations from 20 to something substantially higher. Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of the companies examined by the Council of Institutional Investors, whose members have over $3T in assets. Saying that Walgreens has proxy access is a little like saying Exxon is green because they recycle their office paper. Vote FOR proxy access to make it real. Egan Jones also recommended a FOR vote.
#6 Report Integrating Sustainability into Pay Metrics – The proposal was submitted by Clean Yield Asset Management. Egan Jones wrote the following:
We believe that preparation of a report assessing the feasibility of integrating sustainability metrics to executive compensation is an essential form of commitment to shareholder and environmental accountability. We recommend a vote “FOR” this Proposal.
I voted For.
Walgreens Boots Alliance: Votes Against Board Position in Bold 
As mentioned above, ProxyDemocracy.org had collected the votes of three fund family when I voted. Proxy Insight had reported additional votes. Canada Pension (CPPIB) and Teacher Retirement System of Texas (TRS) voted FOR all items. I see CalSTRS also voted FOR all items. Colorado PERA voted FOR most items, with the exception of Babiak, the auditor and proxy access. Colorado PERA’s vote seems incongruous with their proxy voting policy. The UK’s PIRC recommended FOR most items but AGAINST pay.
Update 1/25/2017: The Local Government Super, the superannuation scheme for local government employees in Australia, voted FOR proposal #5 to amend proxy access bylaws, as did the British Columbia Investment Management Corporation (bcIMC), which invests on behalf of public sector clients.
| # | Proposal Text | CorpGov | Trillium | Calvert | CBIS |
|---|---|---|---|---|---|
| 1a | Elect Director Janice M. Babiak | Against | Against | Against | Against |
| 1b | Elect Director David J. Brailer | For | Against | Against | Against |
| 1c | Elect Director William C. Foote | Against | Against | Against | Against |
| 1d | Elect Director Ginger L. Graham | For | Against | Against | Against |
| 1e | Elect Director John A. Lederer | Against | Against | Against | Against |
| 1f | Elect Director Dominic P. Murphy | For | Against | Against | Against |
| 1g | Elect Director Stefano Pessina | For | Against | Against | Against |
| 1h | Elect Director Leonard D. Schaeffer | Against | Against | Against | Against |
| 1i | Elect Director Nancy M. Schlichting | Against | Against | Against | Against |
| 1j | Elect Director James A. Skinner | For | Against | Against | Against |
| 2 | Ratify Named Executive Officers’ Compensation | Against | Against | For | For |
| 3 | Ratify Deloitte & Touche LLP as Auditors | Against | For | For | Against |
| 4 | Amend Restricted Stock Plan | Against | For | For | For |
| 5 | Adopt Proxy Access Right Included in 1 FocusList: Proxy Access | For | For | For | For |
| 6 | Report on Executive Pay & Sustainability | For | For | For | For |
Walgreens Boots Alliance: Issues for Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners:
Proxy access provision whereby a shareholder, or a group of shareholders, holding at least 3% of the outstanding common stock for at least three years may nominate one director, so long as the number of directors elected via proxy access does not exceed 20% of the board. For nominations to be timely, the Notice of Proxy Access Nomination must be delivered personally to, or mailed to, and received at the Office of the Corporation, addressed to the attention of the Secretary, not less than one hundred and twenty (120) days nor more than one hundred and fifty (150) days prior to the first anniversary of the date that the corporation commenced mailing of its definitive proxy materials for the preceding year’s annual meeting. Nominators whose candidates receive less than 25% of the vote are prohibited from nominating again for the next two annual meetings.
These and other problematic provisions could be addressed with a favorable vote this year on proposal #5. If that fails, I would expect a similar proposal next year.
Walgreens Boots Alliance: Mark Your Calendar
The Company plans to hold the 2018 Annual Meeting on Wednesday, January 17, 2018, at a time and place to be specified in its proxy statement relating to that meeting.
The Company welcomes comments or suggestions from its stockholders. If a stockholder wishes to have a proposal formally considered at the 2018 Annual Meeting and included in the Company’s proxy statement for that meeting, then the Company must receive the proposal in writing on or before the close of business on August 10, 2017 (or, if the date of the 2018 Annual Meeting is moved by more than 30 days from the anniversary of this year’s Annual Meeting, the deadline will be a reasonable time before the Company begins to print and send its proxy materials, which date will be announced by the Company), and the proposal must otherwise comply with Rule 14a-8 under the Exchange Act. The proposal must be delivered in writing to Walgreens Boots Alliance, Inc. 108 Wilmot Road, MS #1858, Deerfield, Illinois 60015, Attention: Corporate Secretary.
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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