$COST, Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. $COST has supermajority vote requirements (66.67%) to amend certain charter provisions, a classified board with staggered terms, and no written consent unless unanimous by all shareholders. In short, reasonable shareholder rights are missing. By way of comparison, Amazon.com ($AMZN) has no supermajority vote requirement, a declassified board elected annually and written consent by majority.
The annual meeting is coming up on January 30, 2018. I voted with the Board’s recommendations 43% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).
Most shareholders don’t vote because reading through 31 pages of the proxy isn’t worth the time for the small difference your vote will make. Below, I tell you how I voted 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 my full post), go immediately to see how I voted my ballot. Voting will take you only a minute or two and every vote counts.
If you get your proxies like I do, you can either pull them up through an email or look for proxy voting on your broker’s website. I use TD Ameritrade, where proxy voting is buried under My Account/History & Statements/Shareholder Library. Since proxy voting is the only thing I see under Shareholder Library I am not sure why it isn’t called Vote Proxy or Proxy Voting.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
$Cost: ISS Rating
From the Yahoo Finance profile: Costco Wholesale Corporation’s ISS Governance QualityScore as of January 1, 2018 is 9. The pillar scores are Audit: 2; Board: 10; Shareholder Rights: 8; Compensation: 9.
$Cost Proxy Voting Guide: Board Proposals
1. $Cost Proxy Voting Guide: Directors
I voted with the Board on all directors except Jeffrey S. Raikes. I took the advice of Egan-Jones to vote against Raikes, since he has served on the Board for at least 10 years and can no longer be considered fully independent. Egan-Jones labels him “affiliated” and argues he should not serve on the Nominating Committee, which should be composed solely of independent directors. I agreed in this case.
2. $Cost: 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 “KPMG, 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.
3. Costco: Executive Compensation
Costco’s Summary Compensation Table shows the highest paid named executive officer (NEO) was President and CEO W. Craig Jelinek at $6.6M in 2017. I’m using Yahoo! Finance to determine market cap ($84B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Costco 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 under that amount. $COST shares outperformed the Nasdaq 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. “Superior” is their rating given on compensation issues for $COST. Egan-Jones concludes:
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.
Given below median pay and recommendation Egan Jones, I voted “FOR” the say-on-pay item.
$Cost: Shareholder Proposals
4. $Cost: Adopt Simple Majority Vote
This proposal is from me, James McRitchie. It calls on $Cost to get rid of supermajority standards to make changes in the charter and/or bylaws. Egan-Jones also recommends a vote For. My prior proposal on this topic at $COST won 65% of the vote but the $Cost Board failed to act. This proposal topic won from 74% to 99% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill, Macy’s and Ferro. I am confident is will again win a wide majority. Will the Board listen this time? I certainly hope so. Of course, a higher vote in favor could make all the difference. Vote For
5. $Cost: Adopt Policy Regarding Prison Labor
Shareholders of Costco urge the Board of Directors to adopt a policy committing the Company to: a) Survey all suppliers to identify sources of prison labor in the Company’s supply chain; b) Develop and apply additional criteria or guidelines for suppliers regarding the use of prison labor; and c) Report to shareholders no later than June 30, 2018, at reasonable cost and omitting proprietary information, on Costco’s progress in implementing the policy. The Costco Supplier Code of Conduct has prohibited prison labor that is unlawful in countries where it is performed. However, it fails to address prison labor performed in countries where such labor is lawful. This proposal would not ban use of prison labor. It simply would ask the Board to inform shareholders on this issue. Why wouldn’t $COST shareholders want that information? Egan-Jones believes it would be too expensive. However, the proposal itself specifies “reasonable cost.” Vote For.
1/28 Update from NorthStar Re Prison Labor
The shareholder proposal is brought by Boston-based socially responsible investment firm NorthStar Asset Management, Inc. “After much research, we have found numerous instances where products or components are being made by prison labor and then are either sold to intermediary companies that may resell to a retailer, or are simply sold directly to retailers. But it’s difficult to trace where these products are made and follow them up through the supply chain to customers,” explained NorthStar Asset Management founder and CEO Julie Goodridge.
Prison labor in the United States, often called “correctional industries” or “prison industries,” goes beyond the stereotypical inmate hammering out license plates. Prison industries have flourished in recent decades as a proposed solution to economic issues of prison overcrowding and behavioral concerns, but critics point to the extremely low wages (often as low as under a dollar per hour) and lack of employment protections or ability to unionize, and have often described it as “modern slavery.”
“We are very concerned about human rights risks in the supply chain,” continued Goodridge. “The best entities to uncover and evaluate suppliers’ use of prison labor are the corporations buying the products. They have the power to address the situation and recommend best practices in real time. Companies like Costco can require that suppliers disclose working conditions, wage levels, and whether the labor is forced or voluntary. These are important factors that investors and customers should have access to.”
In 2015, Whole Foods, another food retailer, was thrust into the news for selling goat cheese and tilapia that had been produced or farmed by inmates. In that case, the retailer cut off ties with the supplier using inmate labor, but NorthStar thinks that decision was a potential misstep. “While we are terribly concerned by the ethics of prison industries in general, ending a supplier relationship won’t solve any problems. We encourage Costco to make a more informed choice – find where the prison labor exists in the supply chain, engage with those suppliers, and develop and follow a best practices protocol,” explained Goodridge.
In its proxy statement, Costco indicates that it will be making certain changes related to prison labor in its Code of Conduct by June 2018. However, NorthStar is not confident that these changes will mitigate public concerns about the use of prison labor in the company’s supply chain, and encourages shareholders to support its proposal despite Costco’s pending changes. In its exempt solicitation filed at the SEC earlier this month, NorthStar encourages shareholders to vote in favor of the proposal to “send a message to the Company to follow through on its proposed changes to the Code of Conduct.” Goodridge elaborated that NorthStar recommends these changes to the Costco Code of Conduct after a comprehensive review of the extent of prison labor in the supply chain, as well as a clear understanding of ‘best practices’ and development of an engagement approach with suppliers. “Policy changes are crucial, but without a full understanding of where prison labor exists in the supply chain and how best to approach suppliers on this issue, policy changes could be ineffective,” explained Goodridge.
CorpGov Recommendations: Votes Against Board Position in Bold 
In addition to Calvert and CBIS votes reported by Proxy Democracy, Proxy Insight reported that Canada Pension Plan and Texas Teachers voted FOR all items, except against #5, voting against the proposal on prison labor. I expect Proxy Insight 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 TEXT | CorpGov | TRILLIUM | CBIS | DOMINI | CALVERT |
|---|---|---|---|---|---|---|
| 1.1 | Elect Director Kenneth D. Denman | For | For | For | For | For |
| 1.2 | Elect Director W. Craig Jelinek | For | For | For | For | For |
| 1.3 | Elect Director Jeffrey S. Raikes | Against | For | For | For | For |
| 2 | Ratify KPMG LLP as Auditors | Against | For | Against | For | For |
| 3 | Ratify Named Executive Officers’ Compensation | For | Against | For | For | For |
| 4 | Adopt Simple Majority Vote | For | For | For | For | For |
| 5 | Adopt Policy Regarding Prison Labor | For | For | For | For | For |
$Cost: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Classified board with staggered terms.
- Supermajority vote requirement (66.67%) to amend certain charter provisions.
- Unanimous written consent.
- Proxy access lite provision whereby a shareholder, or a group of up to 20 shareholders holding at least 3% of the outstanding common stock continuously for at least three (3) years may nominate directors, constituting up to the greater of two directors, or 20% of the Board.
$Cost: Mark Your Calendar
For a shareholder proposal to be included in the proxy statement for the 2019 annual meeting, it must comply with SEC Rule 14a-8 and be received by the Secretary of the Company, at the address below, no later than August 17, 2018.To be properly brought before the 2019 annual meeting of shareholders, a notice of a proxy access nomination under section 2.1 of our bylaws must be received by the Secretary of the Company, at the address below, no earlier than July 18, 2018, and no later than the close of business (5:30 p.m. Pacific Time) on August 17, 2018. Any such notice must meet the other requirements set forth in our bylaws.Notices of intention to present proposals or nominate directors at the 2019 annual meeting, and all supporting materials required by our bylaws, must be submitted by mail to the Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027.
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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