United-Guardian - Various jars and bottles of skin care products with orchid flower

United-Guardian Proxy Rule Violation

United-Guardian (UG), United-Guardian, Inc. manufactures and markets cosmetic ingredients, personal care products, pharmaceuticals, medical lubricants, healthcare products, and specialty industrial products in the United States and internationally. Most shareholders do not vote because reading through the proxy is not worth the time for the small difference your vote will make, although this one is only 16 pages Below, I tell you how I voted and why. The annual meeting is coming up on May 16, 2018. I voted with the Board’s recommendations 0% of the time, since our Company flagrantly violated regulations. 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.

United-Guardian: ISS Rating

From the Yahoo Finance profile: United-Guardian, Inc.’s ISS Governance QualityScore as of N/A is N/A. The pillar scores are Audit: N/A; Board: N/A; Shareholder Rights: N/A; Compensation: N/A.

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. I assume they are too small for ISS to rate.

United-Guardian: Board Proposals

I am not going to follow my usual format here, since the company is so small none of my services provide anything much in the way information or recommendations. Note that United-Guardian’s proxy card is in direct violation of the Required Description under Rule 14a-4(a)(3) of Rule 14a-8 Shareholder Proposals.

Question: Rule 14a-4(a)(3) requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.”  How specifically must a registrant describe a Rule 14a-8 shareholder proposal on its proxy card? Answer: The proxy card should clearly identify and describe the specific action on which shareholders will be asked to vote.  This same principle applies to both management and shareholder proposals.  For example, it would not be appropriate to describe a management proposal to amend a company’s articles of incorporation to increase the number of authorized shares of common stock as “a proposal to amend our articles of incorporation.”  Similarly, it would not be appropriate to describe a shareholder proposal to amend a company’s bylaws to allow shareholders holding 10% of the company’s common stock to call a special meeting as “a shareholder proposal on special meetings.”  The following descriptions of shareholder proposals also would not satisfy Rule 14a-4(a)(3):

  • A shareholder proposal on executive compensation;
  • A shareholder proposal on the environment;
  • A shareholder proposal, if properly presented; and
  • Shareholder proposal #3.

This guidance is over two years old. United-Guardian is clearly attempting to reduce the turnout for my wife’s (Myra Young) shareholder proposal for requesting the board grant proxy access to shareholder nominees by describing her on the proxy as

TO CONSIDER A STOCKHOLDER PROPOSAL DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT, IF PROPERLY PRESENTED AT THE ANNUAL MEETING.

1. United-Guardian Proxy Voting Guide: Directors

Since the above described is a clear violation of the rules, I voted against all directors standing for election. Insiders hold 38% of outstanding shares. They may believe there are no consequences to violating the law, since taking them to court to enforce the law is generally not worth the cost. Vote AGAINST all directors.

2. United-Guardian: Executive Compensation

United-Guardian’s Summary Compensation Table (p. 10) shows the highest paid named executive officer (NEO) was CEO Kenneth H. Globus at $388,000. I’m using Yahoo! Finance to determine market cap ($85M) and I am roughly defining large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. United-Guardian is a small-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $3M in 2014, so pay was under that amount. United-Guardian shares outperformed the Nasdaq over the most recent one-year time period but underperformed during the most recent two- and five-year periods. Normally, I would vote for the pay package. However, United-Guardian’s callous disregard for the law leads me to the following: Vote AGAINST the advisory vote on pay. 

3. United-Guardian: 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.  I voted ABSTAIN.

United-Guardian: Shareholder Proposals

4. United-Guardian: Adopt Proxy Access, or as described by United-Guardian: TO CONSIDER A STOCKHOLDER PROPOSAL DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT, IF PROPERLY PRESENTED AT THE ANNUAL MEETING

As indicated above, this is my wife’s (Myra Young) shareholder proposal, written by me (James McRitchie) requesting the board grant proxy access to shareholder nominees. The vast majority of S&P 500 companies now have proxy access, the ability of 3% shareholders to place a small number of nominees directly on proxy without resorting to an expensive proxy contest. However, proxy access is more sorely needed at micro-cap companies like United-Guardian, where insiders control the company. I voted FOR

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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