Discover 2019 Proxy Vote Recommendations. The Discover Financial Services (DFS) 2019 annual meeting is May 16th. To enhance long-term shareholder value, vote AGAINST directors Aronin, Case, and Weinbach, as well as the auditor. Vote FOR pay, end supermajority standards and shareholder proposal to allow shareholder of 15% to call a special meeting. ABSTAIN on the board proposal allowing shareholders with 25% to call a special meeting.
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. Reading through 70+ pages of the proxy takes too much time. Your vote will make only a small difference but could be crucial. Below, how I voted and why.
If you have read these posts related to my portfolio and proxy proposals for the last 22 years and trust my judgment, skip the 9 minute read. See how I voted my ballot. Voting will take you only a minute or two. Every vote counts.
Discover 2019: ISS Rating
From the Yahoo Finance profile: Discover Financial Services’s ISS Governance QualityScore as of April 1, 2019 is 4. The pillar scores are Audit: 1; Board: 1; Shareholder Rights: 7; Compensation: 7.
Discover 2019 Proxy Voting Guide: Board Proposals
1. Discover 2019: Directors
Egan-Jones Proxy Services recommends FOR, WITH EXCEPTION of Jeffrey S. Aronin, Gregory C. Case, and Lawrence A. Weinbach. According to Egan-Jones’ Proxy Guidelines a director whose tenure on the Board is 10 years or more is considered affiliated, with the exception of diverse nominees. “We believe that key Board committees namely Audit, Compensation and Nominating committees should be comprised solely of Independent outside directors for sound corporate governance practice.”
Vote AGAINST Jeffrey S. Aronin, Gregory C. Case, and Lawrence A. Weinbach.
2. Discover 2019: Executive Compensation
Discover’s Summary Compensation Table shows the highest paid named executive officer (NEO) was President and CEO Roger C. Hochschild at $5.7M. I’m using Yahoo! Finance to determine market cap ($24.7B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Discover 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. Hochschild’s pay puts him in the bottom 10% level for the S&P 500 in 2018, according to MyLogIQ.
Discover shares underperformed the S&P 500 over the most recent one and five year time periods but outperformed over the latest two year period. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 114:1.
Egan-Jones Proxy Services uses a proprietary rating compensation system to measures wealth creation in comparison to other companies. “Superior” is their compensation rating for Discover. They recommend a FOR vote.
Given above below median pay and mixed results:
3. Discover 2019: Ratify Auditors
I have no reason to believe the auditor engaged in poor accounting practices or has a conflict of interest. Egan-Jones recommends voting against the auditor if they served for seven years. Independence becomes compromised by that time. Deloitte & Touche has served more than seven years. No other issues appear significant.
4. Discover 2019: Eliminate Supermajority Voting Requirements
This management proposal is in response to our advisory proposal on the same topic last year, which won more than 79% of the vote. As Egan-Jones notes,
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. As such, we recommend a vote FOR this Proposal.
5. Discover 2019: Right to Call Special Meetings
This proposal from management is likely a response to my advisory proposal below. Currently, shareholders have no right to call a special meeting. Management is now willing to concede that shareholders holding 25% of outstanding shares should be able to call a special meeting. Egan-Jones agrees. I believe a 15% threshold would be more meaningful. However, 25% is better than what we have now.
Discover 2019: Shareholder Proposals
6. Shareholder Proposal: Right to Call Special Meetings
This good governance proposal comes from my wife Myra K. Young (written by me, James McRitchie). The largest shareholders of DFS (Vanguard, Capital Researh, BlackRock, SSgA and PRIMECAP have never, to our knowledge, called for a special meeting and are unlikely to do so even in an emergency situation. They could barely do so, if they all agreed, under the 25% board proposal. More likely to request such an emergency meeting would be funds like Millennium Management or CalPERS but together they only own about 0.65% of Discover. We need a threshold of 15% to allow those who might call a special meeting in an emergency to be able to do so,
See votes reported in advance of the meeting by Proxy Insight by clicking on the graphic at the top of this post (it expands to show more votes). Although it shows a blank, CalPERS voted in favor of Proposal 6. You may wish to look up additional funds in our Shareowner Action Handbook,
- Directors: AGAINST Aronin, Case, and Weinbach
- Executive Pay: FOR
- Auditor: AGAINST
- Eliminate Supermajority Standards: FOR
- Right to Call Special Meetings: ABSTAIN
- Right to Call Special Meetings with 15% Threshold: FOR
Discover 2019: Issues for Future Proposals
Looking at SharkRepellent.net for anti-shareholder provisions:
- 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 Lite limits groups to 20 members.
Discover 2019: Mark Your Calendar
Shareholders intending to present a proposal at the 2020 Annual Meeting and have it included in our proxy statement for that meeting must submit the proposal in writing to Discover Financial Services, c/o Corporate Secretary, 2500 Lake Cook Road, Riverwoods, Illinois 60015. We must receive the proposal no later than December 5, 2019.
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,” chosen by aspiration. 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.
Discover 2019: Addendum
Discover Financial Services (the “Company”) held its 2019 Annual Meeting of Shareholders (the “Annual Meeting”) on May 16, 2019.
At the Annual Meeting, as described below, the shareholders of the Company approved amendments to the Company’s Amended and Restated Certificate of Incorporation to (i) enable shareholders who have beneficial ownership of at least 25% of the Company’s outstanding shares of common stock to call a special meeting of shareholders, subject to the requirements and procedures set forth in the Amended and Restated Bylaws of the Company and (ii) eliminate supermajority voting requirements in the Company’s Amended and Restated Certificate of Incorporation. In connection with these amendments to the Company’s Amended and Restated Certificate of Incorporation, the Company amended and restated its Bylaws, as of May 16, 2019, to set forth certain limitations and procedures with respect to the right of stockholders to call a special meeting and eliminate supermajority voting requirements, a copy of which is included as Exhibit 3.3 to this filing and incorporated herein by reference.