Kelloggs manufactures and markets ready-to-eat cereal and convenience foods in the United States and internationally. The Kellogg Company is one of the stocks in my portfolio.
ProxyDemocracy.org had collected the votes of two fund families when I checked and voted. Their annual meeting is coming up on March 28, 2017
I voted FOR Proxy Access Amendments. See how and why I voted other items below. I voted with the Board’s recommendations 78% of the time. View Proxy Statement.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Kelloggs: ISS Rating
From the Yahoo Finance profile:Kellogg Company’s ISS Governance QualityScore as of April 1, 2017 is 9. The pillar scores are Audit: 2; Board: 4; Shareholder Rights: 10; Compensation: 3. 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: Shareholder Rights.
Kelloggs: Compensation
Kellogg’s Summary Compensation Table (page 45) shows the highest paid named executive officer (NEO) was Chairman and CEO John Bryant at $12.4M in 2016. I am using Yahoo! Finance to determine the market cap ($25.3B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Kelloggs 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 well above that amount. Kelloggs shares outperformed the S&P 500 over the most recent two year time period, but underperformed in the most recent one, five, and ten year time periods.
Egan-Jones Proxy Services takes various measures to arrive at a proprietary rating compensation score, which measure wealth creation in comparison to other widely held issuers.
Kelloggs earned a compensation score of “Good,”
we believe that shareholders should 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 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. Therefore, we recommend a vote “FOR” this Proposal.
I voted “AGAINST” the say-on-pay item. The “Lake Woebegone effect,” where everyone is above average and the averages are recalculated upward every year, has to stop. We cannot just keep voting in favor of higher and higher pay packages. Kelloggs has performed worse than average. I also would have voted against all the compensation committee members: John Dillon (Chair), Don Knauss, Mary Laschinger, Cynthia Milligan, Rogelio Rebolledo and Carolyn Tastad. Unfortunately, Kelloggs has a classified board, so none of them are up for election this year.
Kelloggs: 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. However, Egan-Jones recommends voting against, favoring auditor rotation after seven years. I am not quite ready to set that as the bar, so voted FOR.
Kelloggs: Board Proposals
As mentioned above, I voted “Against” the pay package. As is my habit, when I vote against the pay package, I also vote against/withhold on the compensation committee.
Egan-Jones also recommended that clients
Inside director John Bryant is a current Chairman of the Board and CEO of the Company, and combined with the Board Rating of “Some Concerns” the Company has received, we recommend that clients “WITHHOLD” votes from this nominee. We believe that there is an inherent potential conflict, in having the CEO or former CEO serve as the Chairman of the Board. Consequently, we prefer that companies focus on the following areas to improve its corporate governance practices: separate the roles of the Chairman and CEO, hold annual director elections, have one class of voting stock only, have key board committees consisting of independent directors and majority of independent directors on board and include non-binding compensation vote on agenda to further ensure board independence and accountability..
I’m not quite ready to go that route, even though I certainly concur CEO and Chair positions should be separate.
#5 Approve Omnibus Stock Plan
According to Egan-Jones
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. 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 concurred and voted Against.
Kelloggs: Shareholder Proposals
#6 Proxy Access Bylaw Amendments (p. 82)
James McRitchie (that’s me) is the proponent. I voted ‘FOR.’ Kelloggs has a “lite” version of proxy access. The following amendments would give it robust proxy access:
20% Limit
Current bylaws allow shareholders to nominate only two, easily isolated, directors. My proposal would up that to 25%, yielding 3 nominees. As we know from research on women serving on boards, 3 represents critical mass, to have real impact.
20 Member Limit
Current bylaws limit nominating groups to 20 members. The Council of Institutional Investors studied such provisions and found their members, who hold in excess of $3 trillion in assets, would not be able to meet the requirement of 3% held for 3 years with a 20-member limit. The proposal seeks removal of the cap on the number of members that can form a group.
One thing few take into account is that shares are not consistently held. Funds frequently buy or sell shares. Although many funds could combine that own 3% today, far fewer have held those shares continuously over the last 12 quarters. Most of the largest institutional investors (Vanguard, Fidelity, BlackRock, Northern Trust, etc.) have never even filed a proxy proposal, so would be highly unlikely to participate in a nominating group even if Kelloggs performance plummets for years.
Three reasons for this inactivity come to mind:
- These funds frequently run company retirement programs. Research indicates they vote against management less frequently when they have such contracts. (Proxy Voting Conflicts: Asset Manager Conflicts of Interest in the Energy and Utility Industries, 50/50 Climate Project, 4/16/2017) Since conflicts of interest reduce voting against management for fear of losing contracts, we can assume filing proposals would have an even greater chance of reducing the likelihood of contract renewal.
- Since they are primarily indexed, these funds compete largely based on cost. Although the cost is relatively small, filing proposals does require time and money. Any benefit derived goes equally to competitors holding a similar amount of stock, while all expenses are borne solely by proponents. Filing proposals would put such funds at a competitive disadvantage.
- These funds hold such a relatively high percentage of stock in most companies that they might be able get the type of changes typically sought through shareholder proposals by simply expressing their desires to company management. Therefore, they have no need to file proposals.
If the cap were eliminated chances of being able to form a nominating group would increase substantially. Even without invoking proxy access, a stronger bylaw would encourage directors to look at shareholders, instead of the CEO, as their boss.
Renomination Limit
The third requested change addresses a bylaw provision that prohibits a proxy access candidate who receives less than 25% of the vote to be nominated as a proxy access candidate for the following two years. We would delete that cap. No proxy access candidates have ever run at any company. When it happens, it will be novel and will take some getting used to, just like any new idea — like integrating lunch counters. Shareholders may take some time to get used to the idea of proxy access candidates.
Conclusion
Proxy access at Kelloggs is more of an illusion than reality. Just as the word “natural” doesn’t mean “organic,” proxy access at Kelloggs does not mean shareholders can actually nominate even a single director. Vote for real access; vote FOR #6.
Kelloggs: Votes Against Board Position in Bold 
As mentioned above, ProxyDemocracy.org had collected the votes of two funds when I voted. Proxy Insight reported additional votes from Canada Pension (CPPIB), Teacher Retirement System of Texas (TRS), and others. All voted FOR #6 to amend proxy access bylaws. I hope you will join them.
| # | PROPOSAL TEXT | CorpGov | CALVERT | CBIS |
|---|---|---|---|---|
| 1.1 | Elect Director John Bryant | For | For | For |
| 1.2 | Elect Director Stephanie Burns | For | For | For |
| 1.3 | Elect Director Richard Dreiling | For | For | For |
| 1.4 | Elect Director La June Montgomery Tabron | For | For | For |
| 2 | Advisory Vote to Ratify Named Executive Officers’ Compensation | Against | For | For |
| 3 | Advisory Vote on Say on Pay Frequency | One Year | One Year | One Year |
| 4 | Ratify PricewaterhouseCoopers LLP as Auditors | For | For | Against |
| 5 | Approve Omnibus Stock Plan | Against | Against | For |
| 6 | Amend Proxy Access Right Included in 1 FocusList: Proxy Access | FOR | For | For |
Kelloggs: Issue for Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners. The main outstanding issue is proxy access:
- Classified board with staggered terms.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special mSupermajority vote requirement (66.67%) to approve mergers not approved by a majority of continuing directors (66.67% to amend/repeal).eetings.
- Supermajority vote requirement (66.67%) to amend certain charter and certain bylaw provisions.
- Proxy access ‘lite’ provision whereby a shareholder or group of no more than 20 stockholders holding at least 3% of the outstanding common stock continuously for at least three (3) years may nominate directors, so long as the number of directors elected via proxy access does not exceed the greater of two individuals or 20% of the board. Nominees who receive less than 25% of the votes would be ineligible for nomination under the proxy access provision.
Kelloggs: Mark Your Calendar
Shareowner proposals submitted for inclusion in our proxy statement for the 2018 Annual Meeting of Shareowners must be received by us no later than November 8, 2017. Other Shareowner proposals or Director nominations to be submitted from the floor must be received by us not earlier than November 8, 2017 and not later than December 8, 2017, and must meet certain other requirements specified in our bylaws.
Warnings
James McRitchie
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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