Walgreens Boots Alliance (WBA), operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. Walgreens opposes giving shareholders more effective proxy access to enable us to place nominees on our company’s ballot. Additionally, Walgreens opposes lowering the threshold to enable shareholders to call a special meeting. In short, shareholder rights are lacking. Without changes, Walgreens is likely to continue to lag the Nasdaq, as it has done for the last one and two year time periods.
The annual meeting is coming up on January 17, 2018. I voted with the Board’s recommendations 47% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).
Most shareholders don’t vote because reading through almost 100 pages of the proxy AND many more pages of appendices aren’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.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Walgreens: ISS Rating
From the Yahoo Finance profile: The Clorox Company’s ISS Governance Quality Score as of January 1, 2018 is 1. The pillar scores are Audit: 1; Board: 3; Shareholder Rights: 1; Compensation: 5.
Walgreens Proxy Voting Guide: Board Proposals
1. Walgreens Proxy Voting Guide: Directors
I voted with the Board on all directors except José E. Almeida, William C. Foote, John A. Lederer and Nancy M. Schlichting. I took the advice of Egan-Jones to vote against members of the Compensation Committee when the Company earns a compensation score of Needs Attention. Additionally, the Company’s Omnibus Plan is too dilutive. Egan Jones also 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 against William C. Foote. I find that an interesting policy. In this case it does not matter, since he is on the Compensation Committee and I am already voting against.
2. Walgreens: 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 “Deloitte & Touche, 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. Walgreens: Executive Compensation
Walgreens’ Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Stefano Pessina at $14.7M. I’m using Yahoo! Finance to determine market cap ($72.7B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Walgreens 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 over that amount, even considering inflation. Walgreens shares underperformed the Nasdaq over the most recent one and two 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. “Needs Attention” is their rating given on compensation issues for Walgreens. Egan-Jones concludes:
We believe that shareholders cannot 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 not effective or strongly aligned with the long-term interest of its shareholders. Therefore, we recommend a vote AGAINST this Proposal.
Given above median pay, poor performance and the recommendation Egan Jones, I voted “AGAINST” the say-on-pay item.
4. Walgreens: 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.
5. Walgreens: Amend Stock Plan
From 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 agreed.
Walgreens: Shareholder Proposals
6. Walgreens: Reduce Threshold for Special Meetings
This proposal from my friend John Chevedden deserves support. The proposal would amend the current threshold from 20% to 10%. While funds reporting on Proxy Democracy all favor, Egan-Jones does not, fearing special meetings will be called by small groups with special interests. However, the largest shareholders at Walgreens have never even filed a proxy proposal, so are unlikely to call a special meeting. The largest nominally “active” funds are Soroban Capital Partners, Norges Bank and Franklin Mutual Advisors, which held 0.81%, 0.79% and 0.76% respectively. Since it would take many funds at that level, and there are few, a special meeting is not likely to be called at 10% unless warranted. I voted FOR.
7. Walgreens: Amend Proxy Access Bylaws
This proposal is from another retail shareholder, Kenneth Steiner, using a proposal of my design. As indicated above, even the three largest nominally “active” funds hold less than 2.4%. None are likely to form a proxy access nominating group, which would take substantial effort. As indicated in the proposal and by Egan-Jones (which recommended For), even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the current 3% criteria for a continuous 3-years at most companies according to the Council of Institutional Investors. This proposal addresses the situation that the company now has with proxy access potentially for only the largest shareholders who are the least unlikely shareholders to make use of it. I voted FOR.
CorpGov Recommendations: Votes Against Board Position in Bold 
In addition to Calvert, Trillium and CBIS votes reported by Proxy Democracy, Proxy Insight reported that Texas Teachers and Australian LGS voted FOR both shareholder proposals. 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. Yes, I’m voting a little more against the Board than most but I want to send a real signal to the Board. Join me.
| # | PROPOSAL TEXT | CorpGov | CALVERT | TRILLIUM | CBIS |
|---|---|---|---|---|---|
| 1a | Elect Director Jose E. Almeida | Against | For | For | For |
| 1b | Elect Director Janice M. Babiak | For | For | For | For |
| 1c | Elect Director David J. Brailer | For | For | For | For |
| 1d | Elect Director William C. Foote | Against | For | For | For |
| 1e | Elect Director Ginger L. Graham | For | For | For | For |
| 1f | Elect Director John A. Lederer | Against | For | For | For |
| 1g | Elect Director Dominic P. Murphy | For | For | For | For |
| 1h | Elect Director Stefano Pessina | For | For | For | For |
| 1i | Elect Director Leonard D. Schaeffer | For | For | For | For |
| 1j | Elect Director Nancy M. Schlichting | Against | For | For | For |
| 1k | Elect Director James A. Skinner | For | For | For | For |
| 2 | Ratify Deloitte & Touche LLP as Auditors | For | For | For | Against |
| 3 | Ratify Named Executive Officers’ Compensation | Against | For | Against | For |
| 4 | Advisory Vote on Say on Pay Frequency | One Year | One Year | One Year | One Year |
| 5 | Amend Omnibus Stock Plan | Against | For | Against | Against |
| 6 | Reduce Ownership Threshold to Call Special Meeting | For | For | For | For |
| 7 | Proxy Access Amendments | For | For | For | For |
Walgreens: Issues for Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners:
- Special meetings can only be called by shareholders representing 20% of the voting power.
- 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 25% of the votes would be ineligible for nomination under the proxy access provision for the next two (2) annual meetings.
Walgreens: Mark Your Calendar
If a stockholder wishes to have a proposal formally considered at the 2019 Annual Meeting and included in our proxy statement for that meeting, then we must receive the proposal in writing on or before the close of business on August 1, 2018 (or, if the date of the 2019 Annual Meeting is moved by 30 days from the anniversary of this year’s Annual Meeting, the deadline will be a reasonable time before we begin to print and send our proxy materials, which date we will announce separately), and the proposal must otherwise comply with Rule 14a-8 under the Exchange Act. The proposal must be delivered in writing to us at Walgreens Boots Alliance, Inc., 108 Wilmot Road, MS #1858, Deerfield, Illinois 60015, Attention: Corporate Secretary.
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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