Charles Schwab

Charles Schwab Proxy Voting Guide

Charles Schwab Corporation (SCHW), through its subsidiaries, provides wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Most shareholders do not vote because reading through 100+ pages of the proxy is not 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, have values aligned with mine, 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 15, 2018. I voted with the Board’s recommendations 60% 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.

Charles Schwab: ISS Rating

From the Yahoo Finance profile: The Charles Schwab Corporation’s ISS Governance QualityScore as of April 1, 2018 is 9. The pillar scores are Audit: 1; Board: 8; Shareholder Rights: 9; Compensation: 9.

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 Board, Shareholder Rights and Compensation.

Charles Schwab: Board Proposals

1. Charles Schwab Proxy Voting Guide: Directors

Egan-Jones Proxy Services recommends “For,” all board nominees. However, E-J noted this is a classified board with several directors considered affiliated who E-J would recommend against if up for reelection. Since I voted against the say-on-pay, I also voted AGAINST all members of the compensation committee up for election: Joan T. Dea.

2. Charles Schwab: 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 seven years and their independence is compromised. They also several other issues. I also believe that the companies should consider the rotation of their audit firm to ensure auditor objectivity, professionalism and independence. I have not set a specific number of years. In this case I voted FOR.

3. Charles Schwab: Executive Compensation

Charles Schwab’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Walter W. Bettinger II at $14.3M. I’m using Yahoo! Finance to determine market cap ($79B) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Charles Schwab 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 over that amount. Charles Schwab shares outperformed the Nasdaq over the most recent one, two, and five year time periods. It also appears 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. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 146 to 1.

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 Charles Schwab and they recommend For the say-on-pay item.Egan-Jones

Given above median pay, the appearance on As You Sow‘s list of the 100 Most Overpaid CEOs, and my concern with growing wealth inequality,

I voted “AGAINST” the say-on-pay item and the members of the compensation committee.

4. Charles Schwab: Stock Incentive Plan

Frankly, I was not sure how to vote on this one. Since E-J and most institutional investors disclosing their votes voted FOR, I did as well.

5. Charles Schwab: Adopt Proxy Access

Last year shareholders overwhelmingly voted in favor of a proposal seeking proxy access, submitted by Scott M. Stringer, Comptroller of the City of New York… so our board did not come up with the idea without shareholder initiative. However, some credit is due, since the proposal calls for shareholders to be able to nominate up to 2 or 25% of the board. That is better than a frequently used standard of 2 or 20%, Still, the proposal is definitely ‘lite,’ since it limits nominating groups to 20 members, instead of having no cap. I voted FOR, since it represents progress.

Charles Schwab: Shareholder Proposals

6. Shareholder Proposal: Report on EEO

This proposal, submitted by Scott M. Stringer, request the Company to disclose annually its EEO-1 data – a comprehensive breakdown of its workforce by race and gender according to 10 employment categories – on its website or in its corporate responsibility report, beginning in 2018. Diversity matters. I do not believe a proposal like this must be justified on economic grounds, since it is so obviously the moral choice. However, the proponent cites several studies supporting the proposal on the grounds that it is likely to lead to higher returns. Vote FOR.

6. Shareholder Proposal: Transparent Political Spending

This is my proposal (James McRitchie), so of course I voted FOR.

The proposal is good governance, simply requesting a report to account on political spending. It would do nothing to prevent any such spending. As I have reminded readers in previous posts, the US Supreme Court’s decision in Citizens United v. Federal Election Commission was based on a false premise. Justice Kennedy’s majority opinion justifies the decision by pointing to the Internet.

With the advent of the Internet… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

The decision also said that disclosure

permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.

And the Court expressed enthusiasm that technology today makes disclosure “rapid and informative.” Yet, corporations are notrequired to make the disclosures of lobbying expenditures and political contributions to shareowners as Justice Kennedy seems to have believed. Vote FOR.

As I have reminded readers in previous posts, the US Supreme Court’s decision in Citizens United v. Federal Election Commission was based on a false premise. Justice Kennedy’s majority opinion justifies the decision by pointing to the Internet.

With the advent of the Internet… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

The decision also said that disclosure

permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.

And the Court expressed enthusiasm that technology today makes disclosure “rapid and informative.” Yet, corporations are not required to make the disclosures to shareowners as Justice Kennedy seems to have believed.  See also Shining a light on corporate spending in our elections.

Vote FOR.

Charles Schwab CorpGov RecommendationsProxy Insight

Proxy Democracy is still down. I am starting to look for contributions to bring it back to life. As I write this Proxy Insight had reported on Canada Pension Plan (CPPIB) and Texas Teachers. Both voted in favor of all items, including the shareholder proposals.  Calvert voted against two director candidates, Trillium against all. Both voted for the auditor and against the pay item. Trillium voted against the stock incentive plan. Both voted for both shareholder proposals.

CorpGov Votes:

  1. Directors: AGAINST Joan T. Dea. FOR the rest
  2. Auditor: FOR
  3. Ratify Executive Pay: AGAINST
  4. Stock Incentive Plan: FOR
  5. Provide Proxy Access: FOR
  6. Report EEO Activities: FOR
  7. Report on Political Spending: FOR

Charles Schwab: Issues for Future Proposals

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

  • Classified board with staggered terms.
  •  No action can be taken without a meeting by written consent.
  • Proxy access provisions are Lite.  A shareholder or group of no
  • Shareholders cannot call special meetings.
  • Supermajority vote requirement (80%) to amend certain charter and certain bylaw provisions.
  • No proxy access.

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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