Axon 2019 Proxy Voting Guide

Axon 2019 annual meeting is May 31st. To enhance long-term value. Vote AGAINST both director nominees, Pay, & Auditor. Vote FOR Declassify the Board and Remove Supermajority Requirements.

Axon Enterprise, Inc. (AAXN) develops, manufactures, and sells conducted energy weapons (CEWs) worldwide. Most shareholders do not vote.  Reading through 57+ pages of the proxy takes too much time. Your vote 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 24 years and trust my judgment, skip the 8 minute read. See how I voted my ballot. Voting will take you only a minute or two. Every vote counts.

I voted with the Board’s recommendations 17% 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.

Axon 2019: ISS Governance Ratings

From the Yahoo Finance profile:

Axon Enterprise, Inc.’s ISS Governance QualityScore as of April 1, 2019 is 6. The pillar scores are Audit: 10; Board: 2; Shareholder Rights: 7; Compensation: 3.

2. Axon 2019: Executive Compensation

Axon’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Patrick W. Smith at $246.0M. I’m using Yahoo! Finance to determine market cap ($4.0B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Axon is a mid-cap company.

According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at mid-cap corporations was $8.4M in 2014. Axon shares outperformed the NASDAQ over the most recent one, two, and five year time periods. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 2,585 to 1.

According to MyLogIQ, mean CEO compensation among mid-caps (S&P 600) was $4.2M, median was $3.6M last year. Pay at Axon puts them in the top 90%, which is $7.2M.

Egan-Jones Proxy Services last year, when CEO compensation was $3.8M the previous year, wrote the following:

The Company should re-evaluate and re-assess its Remuneration Policy regarding CEO performance awards  to ensure that the interests of the key individuals are aligned with the business strategy and risk tolerance, objectives, values and long-term interests of the Company and will be consistent with the “pay-for-performance” principle. Accordingly, we recommend a vote AGAINST this Proposal.

Given such an absurdly high CEO pay award last year of $246M (admittedly, only if he meets targets over 10 years), Egan-Jones may again recommend against. I voted against. I also voted against board members up for reelection, given their role in approving compensation. Although it is good to tie pay to performance, this is too much pay, even if he meets targets.

Vote AGAINST.

3. Axon 2019: Ratification of Independent Auditor

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. Grant Thornton, LLP has served more than seven years. No other issues appear significant.

Vote AGAINST.

4. Board Proposal: Declassify the Board

This good governance proposal is a direct result of my proposal from last year on the same topic that passed with 85% of shares voted and by 78% of outstanding shares. As noted by Egan-Jones, “staggered terms for directors increase the difficulty for shareholders of making fundamental changes to the composition and behavior of a board.”

Although the Board recommends FOR, the affirmative vote of the holders of 75% of the outstanding shares of our common stock is necessary for passage. Abstentions and broker non-votes will have the effect of a vote against this proposal, so do not abstain. Will Axon solicit votes on this measure or is it just going through the motions?

Vote: FOR

5. Shareholder Proposal: Remove Supermajority Vote Requirements

This good governance proposal comes from me, James McRitchie, so of course I voted FOR. Small factions should not prevent those holding a majority of shares from acting. “The Board of Directors is not recommending a vote for or against Proposal No. 5.”

Vote: FOR

Axon 2019: Issues for Future Proposals

Looking at SharkRepellent.net for anti-shareholder provisions:

• Classified board with staggered terms.
• Plurality vote standard to elect directors with no resignation policy.
• Special meetings can only be called by shareholders holding not less than 50.1% of the voting power.
• Supermajority vote requirement (66.67% or 75%) to amend certain charter provisions. Supermajority vote requirement (66.67%) to amend all bylaw provisions.
• No proxy access.

Axon 2019: Mark Your Calendar

To be eligible for inclusion in the Company’s proxy materials for the 2020 Annual Meeting of Shareholders, a proposal intended to be presented by a shareholder for action at that meeting must, in addition to complying with the shareholder eligibility and other requirements of the SEC’s rules governing such proposals, be received not later than December 20, 2019 by the Corporate Secretary of the Company at the Company’s principal executive offices, 17800 North 85th Street, Scottsdale, Arizona 85255.

Axon CEO on His 10-Year Performance Package

Axon 2019: Addendum

According to 8-K our proposal to remove supermajority requirements passed, winning 96.6%of the vote with 39,496,244 shares voted FOR and 1,370,952 AGAINST. However, management lost its proposal to declassify the Board because, although they won 98% of the vote, they  only won 71% of votes outstanding, instead of the required 75%. How hard did they push? Not hard enough.

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,” 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.