CLX Clorox: You Don't have to vote with the Board

CLX: Vote Clorox Proxy Access

The Clorox Company, CLX, manufactures and markets consumer and professional products worldwide. It operates through four segments: Cleaning, Household, Lifestyle, and International. CLX opposes giving shareholders effective proxy access to enable us to place nominees on our company’s ballot. Shareholders have no right to act by written consent. It takes 25% of shareholders to call a special meeting and 80% to amend certain charter amendments. In short, shareholder rights are lacking. Without changes, CLX is likely to continue to lag the S&P 500, as it has done for the last one, two and five year time periods.

Most shareholders don’t vote because reading through 77 pages of the proxy AND many more pages of appendices isn’t worth the time for the small difference your vote will make. Below, I tell you how I am voting and why. If you have read these posts related to my portfolio for the last 22 years and trust my judgment (or you don’t want to take the time to read it), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.

The annual meeting is coming up on November 15, 2017. I voted with the Board’s recommendations 90% 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.

 CLX: ISS Rating

From the Yahoo Finance profile: The Clorox Company’s ISS Governance QualityScore as of October 15, 2017 is 6. The pillar scores are Audit: 1; Board: 3; Shareholder Rights: 7; Compensation: 6.

Corporate governance scores courtesy of Institutional Shareholder Services (ISS). Scores indicate decile rank relative to index or region. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk. Therefore, we need to pay closer attention to shareholder rights and executive compensation.

CLX Proxy Voting Guide: Board Proposals

1. CLX Proxy Voting Guide: Directors

I voted with the Board on all directors. Egan-Jones considers directors, such as those with 10 years or more on the Board as “affiliated” and, therefore should not be serving key board committees. On that basis, they recommend a withhold from Robert W. Matschullat. I find that an interesting policy but am not quite ready to embrace it.

2. CLX: Executive Compensation

Clorox Company’s Summary Compensation Table shows the highest paid named executive officer (NEO) was Chairman/CEO Benno Dorer at $8.1M. I’m using Yahoo! Finance to determine market cap ($16.85B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Clorox Company 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 2014, so pay was well under that amount. CLX shares underperformed the S&P500 over the most recent one, two, and five year time periods.

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. “Good” is their rating given on compensation issues for CLX. Egan-Jones concludes:
Egan-Jones

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.

Given below median pay and recommendation Egan Jones, I voted “FOR” the say-on-pay item, despite continued underperformance.

3. CLX: Say on Pay Vote Frequency

I always vote for ONE YEAR frequency, since this provides shareholders with more information and a greater opportunity for input.

4. CLX: Ratify Auditors

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 notes “Ernst & Young, LLP has been serving as the Company’s auditor for more than seven years. We believe that the companies should consider the rotation of their audit firm to ensure auditor objectivity, professionalism and independence.” I agree, so voted AGAINST.

5. CLX: Amend Stock Plan

There seems to be a disagreement on this one between Calvert, as reported on Proxy Democracy saying the plan’s dilution exceeds 10% and Egan-Jones saying it is substantially less. “Egan-Jones does not include granted but unexercised shares in its dilution calculation since these options are already held by grantees and often can be exercised at any time including prior to the publication of this report.” That may be the difference. From what I understand, voting against the material terms of the plan won’t change the plan. It will only limit its tax deductibility. I voted FOR.

6. CLX: Equity Award Policy for Directors

Egan-Jones recommended for. Both funds reported voting in advance voted for. I voted FOR.

7. CLX: Shareholder Proposals

There is only one shareholder proposal on the proxy. The proposal is mine, so you can be sure I voted ‘FOR.’ Egan-Jones recommended for and both funds reported voting in advance voted for.

The proposal seeks to amend existing proxy access bylaws at CLX that give the appearance of providing a mechanism for shareholders to place up to two nominees on the proxy under specified circumstances. However, the conditions would make that nearly impossible. The suggested amendments would make such intervention more feasible by eliminating limits on shareholders forming a group, allowing up to 25% of seats to be so nominated (instead of 20%) and removing the conditions on renomination. This is simple good governance, especially needed at an underperforming company like CLX. Again, I voted FOR.

CorpGov Recommendations: Votes Against Board Position in Bold Proxy Insight

In addition to Calvert and CBIS votes reported by Proxy DemocracyProxy Insight reported that Canada Pension Plan voted FOR all items. I expect they will report out a few more votes before the meeting.  My recommended votes that differ from what the Board recommends are noted in bold.

# PROPOSAL CorpGov CALVERT CBIS
1.1 Elect Director Amy Banse For For For
1.2 Elect Director Richard H. Carmona For For For
1.3 Elect Director Benno Dorer For For For
1.4 Elect Director Spencer C. Fleischer For For For
1.5 Elect Director Esther Lee For For For
1.6 Elect Director A.D. David Mackay For For For
1.7 Elect Director Robert W. Matschullat For For For
1.8 Elect Director Jeffrey Noddle For For For
1.9 Elect Director Pamela Thomas-Graham For For For
1.10 Elect Director Carolyn M. Ticknor For For For
1.11 Elect Director Russell Weiner For For For
1.12 Elect Director Christopher J. Williams For For For
2 Advisory Vote to Ratify Named Executive Officers’ Compensation For For For
3 Advisory Vote on Say on Pay Frequency One Year One Year One Year
4 Ratify Ernst & Young LLP as Auditors Against For Against
5 Amend Omnibus Stock Plan For Against For
6 Approve Equity Award Policy for Non-Employee Directors For For For
7 Amend Proxy Access Right FOR For For

CLX: Issues for Future Proposals

SharkRepellentLooking at SharkRepellent.net for other provisions unfriendly to shareowners:

  • No action can be taken without a meeting by written consent.
  • Special meetings can only be called by shareholders representing 25% of the voting power.
  • Supermajority vote requirement (80%) to amend certain charter provisions.
  • Proxy access provisions are Lite.  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 20% of the board. Nominees who receive less than 20% of the votes would be ineligible for nomination under the proxy access provision for the next two (2) annual meetings. Voting FOR proposal #7 could lead the Board to move on these issues.

Clorox Company: Mark Your Calendar

In the event that a stockholder wishes to have a proposal considered for presentation at the 2018 Annual Meeting of Stockholders and included in the Company’s proxy statement and form of proxy used in connection with such meeting pursuant to Exchange Act Rule 14a-8, the proposal must be received by the Company’s Corporate Secretary no later than the close of business on May 25, 2018. Any such proposal must comply with the requirements of Rule 14a-8.

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. For more on the subject, see CEO Pay Machine Destroying America.

  

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