Kansas City Southern Proxy Voting Guide – KSU

Kansas City Southern Proxy Voting GuideKansas City Southern Proxy Voting Guide by Corporate Governance (CorpGov.net). Kansas City Southern (KSU), through its subsidiaries, provides freight rail transportation services between Kansas City, Missouri, and various ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi, and Texas, as well as between Mexico City and Laredo. KSU is one of the stocks in my portfolio. ProxyDemocracy.org had collected the votes of three fund families when I checked and voted. Their annual meeting is coming up on May 4, 2017

I voted FOR Proxy Access Amendments: AGAINST pay, compensation committee and other items. See how and why I voted all items below. I voted with the Board’s recommendations 38% of the time. View Proxy Statement 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.

Kansas City Southern Proxy Voting Guide: ISS Rating

From the Yahoo Finance profile: Kansas City Southern’s ISS Governance QualityScore as of April 1, 2017 is 9. The pillar scores are Audit: 2; Board: 3; Shareholder Rights: 5; Compensation: 10. 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.

Kansas City Southern Proxy Voting Guide: Compensation

Starbucks’ Summary Compensation Table shows the highest paid remaining named executive officer (NEO) was CEO Patrick J. Ottenmeyer  at $5.9M in 2016. I am using Yahoo! Finance to determine the market cap ($9.5B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. KSU 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 slightly above that amount. KSU shares underperformed the NASDAQ over the most recent one, two, five, and ten year time periods. That makes me wonder why I still own it. KSU is a relative monopoly. If the current management cannot beat the averages, maybe it is time for turnaround managers.

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.

KSU earned a compensation score of “Good.”
Egan-Jones

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. Total shareholder return has been poor. As Calvert points out:

The company awarded its former CEO an $850,000 cash bonus in connection with his retirement. Additionally, supplemental performance awards rely on goals of questionable rigor, given that two of the tranches vested within three months of the grant date. Finally, the new CEO’s special equity award includes a retesting feature that provides multiple opportunities to earn the award.

I also voted against all the compensation committee members: Rodney E. Slater (Chairman), Robert J. Druten, and David-Garza Santos.

Kansas City Southern Proxy Voting Guide: 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.

Kansas City Southern Proxy Voting Guide: 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

“WITHHOLD” votes from Affiliated outside directors Robert J. Druten and Rodney E. Slater, current members of the Compensation and Nominating committees; Affiliated outside director Terrence P. Dunn, current member of the Nominating committee; and Affiliated outside director Thomas A. McDonnell, current member of the Audit and Nominating committees of the Board. We believe that key Board committees namely Audit, Compensation and Nominating committees should be comprised solely of Independent outside directors for sound corporate governance practice.

Furthermore, we note that the Mr. Druten is the Company’s Chairman who holds more than one other public directorship. We believe that the Chairman, being responsible for the leadership of the Board and the creation of the conditions necessary for overall board and individual director effectiveness, should hold no more than one other public directorship to ensure the valuable and prudent exercise of his fiduciary duties as a Chairman and that his integrity and efficiency are not compromised.

That seems like excellent advice to me, so I did the same.

#3 Approve Omnibus Stock Plan

Egan-Jones recommended FOR but I voted AGAINST, since the stock plan simply compounds the CEO’s total compensation.

Kansas City Southern Proxy Voting Guide: Shareholder Proposals

#6 Proxy Access Bylaw Amendments

James McRitchie (that’s me) is the proponent. Of course, I voted ‘FOR.’ KSU has a “lite” version of proxy access. The following amendment would provide more robust proxy access:

 20 Member LimitCII - Proxy Access: Best Practices

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 lifting the cap on the number of members that can form a group to 40 or 50.

Most of the largest institutional investors (Vanguard, Fidelity, BlackRock, SSgA etc.) have never even filed a proxy proposal, so would be highly unlikely to participate in a nominating group even if KSU performance plummets for years.

Three reasons for this inactivity come to mind:

  1. 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.
  2. 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.
  3. 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. Vote FOR #5.

Kansas City Southern Proxy Voting Guide: Votes Against Board Position in Bold Proxy Insight

As mentioned above, ProxyDemocracy.org had collected the votes of three funds when I voted.  Proxy Insight reported additional votes from Canada Pension (CPPIB) and Teacher Retirement System of Texas (TRS)  voted. Both vote AGAINST the pay plan and FOR #6 amendments to KSU’s proxy access bylaws.

# PROPOSAL TEXT CorpGov CALVERT  TRILLIUM CBIS
1.1 Lu M. Cordova For For Against For
1.2 Robert J. Druten Against For Against For
1.3 Terrence P. Dunn Against For Against For
1.4 Antonio O. Garza, Jr. For For Against For
1.5 David Garza-Santos Against For Against For
1.6 Thomas A. McDonnell Against For Against For
1.7 Patrick J. Ottensmeyer For For Against For
1.8 Rodney E. Slater Against For Against For
2 Ratify KPMG LLP as Auditors For For For For
3 Approve Omnibus Stock Plan Against For Against Against
4 Ratify Named Executive Officers’ Compensation Against Against Against Against
5 Advisory Vote on Say on Pay Frequency One Year One Year One Year One Year
6 Amend Proxy Access Right

Included in FocusLists FocusList: Proxy Access
FOR For For For

Kansas City Southern Proxy Voting Guide: Issue for Future Proposals

SharkRepellentLooking at SharkRepellent.net for other provisions unfriendly to shareowners. The main outstanding issue is proxy access:

  • No action can be taken without a meeting by written consent.
  • Special meetings can only be called by shareholders holding not less than 25% of the voting power.
  • Proxy lite access provision whereby a shareholder or group of no more than 20 shareholders 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 directors or 20% of the board.

Kansas City Southern Proxy Voting Guide: Mark Your Calendar

If a holder of our Common Stock wishes to present a proposal for inclusion in our proxy statement for next year’s annual meeting of stockholders, the proposal must be made in accordance with the applicable laws and rules of the SEC and the interpretations thereof, as well as our Bylaws. Any such proposal should be sent to our Corporate Secretary at P.O. Box 219335, Kansas City, Missouri 64121-9335 (or if by express delivery to 427 West 12th Street, Kansas City, Missouri 64105) and must be received no later than December 5, 2017.

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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