Discover Financial Services (DFS), through its subsidiaries, operates as a direct banking and payment services company in the United States. Most shareholders do not vote because reading through 60+ pages of the proxy is not 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 May 2, 2018. I voted with the Board’s recommendations 93% 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.
Discover Financial Services: ISS Rating
From the Yahoo Finance profile: Discover Financial Services’s ISS Governance QualityScore as of April 1, 2018 is 6. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 7; Compensation: 8.
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 the board, shareholder rights and executive compensation.
Discover Financial Services: Board Proposals
1. Discover Financial Services Proxy Voting Guide: Directors
Egan-Jones Proxy Services recommends “For,” with the exception of: 1A) Jeffrey S. Aronin, 1C) Gregory C. Case, 1I) David W. Nelms, 1K) Lawrence A. Weinbach. “Against” is recommended for Nelms because he occupies both chair and CEO positions. Additionally, the others are opposed because major committees, such as the audit committee should be composed only of independent directors. Although I am sympathetic, I voted FOR all directors.
2. Discover Financial Services: Executive Compensation
Discover Financial Services Summary Compensation Table (page 33) shows the highest paid named executive officer (NEO) was Chairman and CEO David W. Nelms at $10.2M. I’m using Yahoo! Finance to determine market cap ($26B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Discover Financial Services 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, especially considering inflation. Discover Financial Services shares underperformed the S&P500 over the most recent one and five year time periods and exceeded it over the most recent two year time period. At least Discover Financial Services does not appear on As You Sow‘s list of the 100 Most Overpaid CEOs. Prior reports have shown that being on that list is correlated with lower returns in subsequent years.
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 Discover Financial Services. Egan-Jones concludes:
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 mixed performance, median pay, the recommendation of Egan Jones, I voted “FOR” the say-on-pay item.
3. Discover Financial Services: 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 that Deloitte & Touche, LLP has been serving as the Company’s auditor for over seven years and their independence is compromised. I have not set a specific number of years, so in this case voted FOR.
Discover Financial Services: Shareholder Proposals
4. Simple Majority Voting Standard
This is my proposal (James McRitchie on behalf of my wife, Myra Young), so of course I voted FOR.
Egan-Jones writes: “We believe that the advantages of eliminating supermajority provisions outweigh the benefits of maintaining it as a voting standard. We believe that a simple majority vote will strengthen the Company’s corporate governance practice. Contrary to supermajority voting, a simple majority standard will give the shareholders equal and fair representation in the Company by limiting the power of shareholders who own a large stake in the entity, therefore, paving way for a more meaningful voting outcome. After evaluating the details pursuant to the shareholder proposal and in accordance with the Egan-Jones’ Proxy Guidelines, we recommend a vote FOR this Proposal.”
Discover Financial Services: CorpGov Recommendations
Proxy Insight reported the votes of four funds: Teacher Retirement System of Texas, Canada Pension Plan Investment Board (CPPIB), Calvert Research and Management, Inc, Christian Brothers Investment Services (CBIS), and Local Government Superannuation Scheme. They voted FOR every item, with the single exception that CBIS voted AGAINST ratifying the auditor. I voted FOR every item and recommend you do the same.
Discover Financial Services: Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners:
- No action can be taken without a meeting by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (80%) to amend certain charter and all bylaw 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 25% of the votes would be ineligible for nomination under the proxy access provision for the next two (2) annual meetings. Voting FOR proposal #4 could lead the Board to move on these issues.
Discover Financial Services: Mark Your Calendar
Shareholders intending to present a proposal at the 2019 Annual Meeting and have it included in our proxy statement for that meeting must submit the proposal in writing to Kathryn McNamara Corley, Secretary, 2500 Lake Cook Road, Riverwoods, Illinois 60015. We must receive the proposal no later than November 16, 2018.
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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