Guidewire Software 2019 annual meeting is December 17th. To enhance long-term value: Vote FOR #5 – Majority Voting for the Election of Directors; #4 Eliminate Classified Board. AGAINST director Michael Keller and the auditor. Unfortunately, the meeting is virtual-only, instead of hybrid, so shareholders cannot meet each other, the directors or management. The board/management can also screen out any comments or criticisms.
Update 12/17/2019. All items on the proxy passed, according to the preliminary tally, including our proposal to move to majority voting for the election of directors. Although at the top of the meeting they announced they would take questions, I submitted three (see below) and none were responded to. From what I could tell, there may have only been 4 people “attending” the virtual meeting.
Guidewire Software (GWRE) provides software products for property and casualty insurers worldwide. Most shareholders do not vote. Reading through 60+ 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 in my ballot. Voting will take you only a minute or two. Every vote counts.
I voted with the Board’s recommendations 43% 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.
Guidewire Software 2019: ISS Ratings
From the Yahoo Finance profile: Guidewire Software, Inc.’s ISS Governance QualityScore as of October 4, 2019 is 9. The pillar scores are Audit: 5; Board: 3; Shareholder Rights: 8; Compensation: 10.
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. We need to pay close attention to Shareholder Rights and Compensation.
Guidewire Software 2019 Proxy Voting Guide: Board Proposals
1. Guidewire Software 2019: Directors
Egan-Jones Proxy Services recommends Against: Michael Keller. Apparently, he is considered an “affiliated” outside director because he has some sort of professional services contract with the firm. Egan-Jones’ Proxy Guidelines state that the key Board committees namely Audit, Compensation, and Nominating Committees be comprised solely of independent outside directors for sound corporate governance practice. Since Keller serves on the Compensation Committee, I am voting Against him.
Vote: AGAINST Michael Keller.
2. 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. KPMG, LLP has served more than seven years. No other issues appear significant.
3. Executive Compensation
Guidewire Software’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO Marcus S. Ryu at $4.6M. I’m using Yahoo! Finance to determine market cap ($9.9B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Guidewire Software 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. Guidewire Software shares outperformed the S&P 500 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 28 to 1.
Egan-Jones Proxy Services uses a proprietary rating compensation system to measures wealth creation in comparison to other companies.
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 below median pay aligned with performance, healthy shareholder returns and a fairly low CEO pay ratio, voted FOR.
4. Eliminate Classified Board
This Board proposal follows passage of a proposal last year by my wife, Myra Young, to eliminate the classified board, which reviewed a FOR vote of higher than 92%.
Note: I am concerned the Board is not recommending an additional amendment to allow directors to be removed with or without cause. In December 2015, the Delaware Court of Chancery (the “Court”) issued a decision, In Re VAALCO Energy, Inc., in which the Court interpreted Section 141(k) of General Corporation Law of the State of Delaware and held that if a company does not have (i) a classified board of directors or (ii) cumulative voting in election of directors, then such company may not provide in its certificate of incorporation or bylaws that its directors may be removed only for cause. Prior to the VAALCO decision, it was unclear whether Section 141(k) prohibited allowing director removal only for cause when a company did not have classified board or did not allow for a cumulative vote.
Guidewire Software 2019 Proxy Voting Guide: Shareholder Proposal
5. Shareholder Proposal: Elect Uncontested Directors by Majority Vote
This good governance proposal comes from my wife, Myra Young, so of course I voted FOR. Egan-Jones agrees. The Board opposes the proposal:
Our board of directors believes that such mandatory consequential resignation by directors who do not receive the requisite vote does not provide our board of directors with any discretion to consider the circumstances, interests and needs of the Company and its stockholders, as well as legal requirements, and could, therefore, be detrimental to the Company.
That opposition seems to ignore the clear wording of the proposal, which includes the following:
This proposal includes that a director who receives less than such a majority vote be removed from the board immediately or as soon as a replacement director can be qualified on an expedited basis.
Why would the Board object to removing a director that does not even win by a majority of votes cast when that director faces no actual challenger? That seems like a very low bar. More than 90% of companies in the S&P 500 have adopted majority voting for uncontested elections, as have 67% of the S&P 600 companies.
Guidewire Software 2019 CorpGov Recommendations
Proxy Insight had only reported votes of CBIS as of when I last checked. They may have updated by the time I post this. CBIS voted the same as I did. Great minds think alike? Update (12/16): British Columbia Investment Board voted Against Keller, FOR all other items. Calvert, CalSTRS and the New York City Comptroller voted FOR all items.
- Directors: AGAINST Michael Keller.
- Auditor: AGAINST
- Executive Pay: FOR
- Eliminate Classified Board: FOR
- Elect Uncontested Directors by Majority Vote: FOR
Guidewire Software 2019: Questions for Annual Meeting
- Why virtual-only rather than hybrid meeting?
- Why has the board not proposed an amendment to allow directors to be removed with or without cause as required per December 2015, the Delaware Court of Chancery (the “Court”) issued a decision, In Re VAALCO Energy, Inc.?
- Why are shareholder proxy proposals for 2020 due in 2019? That is exceptionally early.
Guidewire Software 2019: Issues for Future Proposals
Looking at SharkRepellent.net and for anti-shareholder provisions:
- Classified Board will hopefully be repealed this year.
- Directors can only be removed for “cause.”
- Uncontested directors elected on plurality vote. Hopefully, that will be corrected this year.
- Shareholders cannot act by written consent.
- Shareholders cannot call special meetings.
- Supermajority vote requirement (67%) to amend certain charter/bylaw provisions.
- No shareholder access to the proxy to nominate directors.
Further research is needed to confirm the following:
- There does not appear to be a policy prohibiting directors from hedging stock.
- Guidewire does not appear to have disclosed clawback provisions.
- Only 20% of directors are women and only 10% appear to be a minority. Do they have a policy in place to address diversity?
- There does not appear to be a policy prohibiting directors from being overboard.
- It is unclear if Guidewire Software has a succession plan.
Guidewire Software 2019: Mark Your Calendar
To be included in our proxy statement for the 2020 annual meeting, stockholder proposals must comply with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and be received by our Secretary at our principal executive offices by mail at 2850 S. Delaware St., Suite 400, San Mateo, California 94403 no later than [_______], 2019, which is one hundred twenty (120) calendar days before the one-year anniversary of the date on which we first released this proxy statement to stockholders in connection with this year’s annual meeting.
It is odd to tell shareholders they must file proposals in 2019 for the 2020 meeting. A year in advance?
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.
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