EllieMae, Inc. (ELLI) provides on-demand software solutions and services for the residential mortgage industry in the United States. EllieMae is one of the stocks in my portfolio. ProxyDemocracy.org had collected the votes of one fund family when I checked and voted. Their annual meeting is coming up on May 17, 2017, so vote now.
I voted FOR #4 to declassify the board. See how and why I voted other items below. I voted with the Board’s recommendations % of the time. View proxy via SEC’s EDGAR system (look for DEF 14A).
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
EllieMae: ISS Rating
From the Yahoo Finance profile: EllieMae’s ISS Governance QualityScore as of May 1, 2017 is 6. The pillar scores are Audit: 1; Board: 4; Shareholder Rights: 4; 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: Compensation.
EllieMae: Compensation
EllieMae’s Summary Compensation Table (p. 47) shows the highest paid named executive officer (NEO) was CEO Jonathan Corr at $4.3M in 2016. I am using Yahoo! Finance to determine the market cap ($3.7B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B.EllieMae is a mid-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at mid-cap corporations was $5.3M in 2015, so pay was below that amount. EllieMae shares outperformed the NASDAQ over the most recent one, two, 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.
EllieMae earned a compensation score of “Superior,”
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 agreed and voted “FOR” the say-on-pay item.
EllieMae: 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.
EllieMae: Board Proposals
Egan-Jones also recommended that clients vote FOR all directors. However, that endorsement was qualified with the following statement:
If in the future, Affiliated outside director Crag Davis continues to serve on the Compensation and Nominating/Corporate Governance Committee, Affiliated outside director Frank Schultz continues to serve on the Nominating/Corporate Governance committee, Affiliated outside director Carl Buccellato continues to serve on the Compensation committee and Affiliated outside director A. Barr Dolan continues to serve on the Audit committee, we will recommend that clients withhold votes from them upon re-election. We prefer that the key Board committees namely Audit, Compensation and Nominating/Corporate Governance Committees be comprised solely of independent outside directors for sound corporate governance practice.
That seems like excellent advice to me, so I did the same.
EllieMae: Shareholder Proposals
#4 Declassify the Board of Directors
James McRitchie (that’s me) is the proponent. I voted ‘FOR.’ Only 31% of the S&P 1500 have a classified board. Per the chat below, classified boards are rare at S&P 500 companies. Here’s what Egan-Jones said:
Recommendation: After evaluating the details given about the shareholder proposal, we believe that corporate governance procedures and practices, and the level of accountability that the Company imposes, are closely related to financial performance. It is intuitive that when directors are accountable for their actions, they perform better. We therefore prefer that the entire board of a company be elected annually to provide appropriate responsiveness to shareholders. As such, we recommend a vote FOR this Proposal.
Background: The shareholders are being asked that the Company take the steps necessary to reorganize the Board of Directors into one class with each director subject to election each year. Although the company can adopt this proposal topic in one-year and many investors are in favor of a one-year implementation, this proposal allows the option to phase it in over 3-years.
Arthur Levitt, former Chairman of the Securities and Exchange Commission said, “In my view it’s best for the investor if the entire board is elected once a year. Without annual election of each director shareholders have far less control over who represents them.”
A total of 79 S&P 500 and Fortune 500 companies, worth more than one trillion dollars, adopted this proposal topic since 2012. Annual elections are widely viewed as a corporate governance best practice. Annual election of each director could make the directors more accountable, and thereby contribute to improved performance and increased company value.
This proposal may get strong support at the 2017 annual meeting. For instance in 2016 the Company gave strong majority support to another corporate governance improvement proposal – proxy access for shareholders.
Vote FOR #4.
EllieMae: Votes Against Board Position in Bold
As mentioned above, ProxyDemocracy.org had collected the votes of one fund when I voted. Proxy Insight reported additional votes from CalSTRS, Teacher Retirement System of Texas (TRS), and Calvert. Each voted FOR all items, including Item #4 to declassify the board of directors.
| # | PROPOSAL TEXT | CorpGov/CalSTRS/TRS/Calvert | CBIS |
|---|---|---|---|
| 1.1 | Elect Director Karen Blasing | For | For |
| 1.2 | Elect Director Jonathan Corr | For | For |
| 1.3 | Elect Director Robert J. Levin | For | For |
| 1.4 | Elect Director Jeb S. Spencer | For | For |
| 2 | Ratify Grant Thornton LLP as Auditors | For | Against |
| 3 | Ratify Named Executive Officers’ Compensation | For | For |
| 4 | Declassify the Board of Directors | FOR | For |
EllieMae: Issue for Future Proposals
- Classified board with staggered terms.
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Proxy access ‘lite’ provision whereby a shareholder or group of no more than 20 shareholders holding at least 3% of the outstanding common shares 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 directors and 20% of the Board.
EllieMae: Mark Your Calendar
To be considered for inclusion in our proxy materials for next year’s annual meeting in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), your proposal must be submitted in writing by December 7, 2017, to our Secretary, at Ellie Mae, Inc., 4420 Rosewood Drive, Suite 500, Pleasanton, California 94588 and must otherwise comply with the requirements of Rule 14a-8 of the Exchange Act.
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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