Costco 2020 annual meeting is January 22nd. To enhance long-term value: Vote AGAINST Charles T. Munger, Auditor, and “True Diversity” Board Policy; FOR Director Removal Without Cause. 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.
Costco Wholesale Corporation (COST), together with its subsidiaries, operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. Most shareholders do not vote. Reading through 30 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 80% 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.
Costco 2020: ISS Ratings
From the Yahoo Finance profile: Costco Wholesale Corporation’s ISS Governance QualityScore as of October 4, 2019 is 7. The pillar scores are Audit: 5; Board: 5; Shareholder Rights: 5; Compensation: 7.
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.
Costco 2020 Proxy Voting Guide: Board Proposals
1. Costco 2020: Directors
Egan-Jones Proxy Services recommends Against Charles T. Munger. 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.” Why not apply the same standards to diverse nominees?
Vote: AGAINST Charles T. Munger.
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
Costco 2020 Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO W. Craig Jelinekat $8M. I’m using Yahoo! Finance to determine market cap ($131B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Costco 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. Costco 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 141 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 and healthy shareholder returns, I voted FOR.
4. Removal of Directors Without Cause
As I wrote in my shareholder proposal to Costco:
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.
Although Costco Wholesale Corporation (Costco) is incorporated in Washington State, not Delaware, the Delaware ruling would suggest review of organizational and governing documents is prudent, particularly at companies such as Costco, which recently declassified its board. Washington Business Corporation Act (RCW 23B.08.080) provides “shareholders may remove one or more directors with or without cause unless the articles of incorporations provide that directors may only be removed for cause.”
To obtain a board majority between annual meetings in an emergency situation, shareholders must be able to create vacancies and be able to fill them. Although Costco allows shareholders to call a special meeting, the main purpose of calling a special meeting is to change the board between annual meetings.
The current right of shareholders to call a special meeting can accomplish little if directors cannot be removed without cause. See The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent by Emiliano Catan and Marcel Kahan, November 2018.
Since the Board agreed to submit this proposal, I withdrew mine.
5. Shareholder Proposal: “True Diversity Board Policy”
This proposal, which I assume is from National Center for Public Policy Research, seeks to add a litmus test for the “ideology” of directors. Although Egan-Jones recommended, for, I do not. While I certainly favor diversity, and diversity of thought is important, I do not want candidates to have to describe their political ideology. We do not live in a dictatorship. Corporations should not be democratic-free zones. Directors should not be required to identify their political affiliations. Political ideology should play no role in the execution of board responsibilities.
Proxy Insight had not reported any votes as of when I last checked. They may have updated by the time I post this. Looking up a few funds announcing votes in advance, Trillium and NYC Pensions voted FOR all items except the “True Diversity” shareholder proposal, which they voted AGAINST. Praxis voted AGAINST Decker, Galanti, Munger and the “True Diversity” proposal.
- Directors: AGAINST Charles T. Munger.
- Auditor: AGAINST
- Executive Pay: FOR
- Removal of Directors Without Cause: FOR
- “True Diversity” (though ideology): AGAINST
Costco 2020: Questions for Annual Meeting
- Why virtual-only rather than hybrid meeting?
- Why had 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.?
Costco 2020: Issues for Future Proposals
Looking at SharkRepellent.net and for anti-shareholder provisions:
- Unanimity is required for written consent by shareholders, an impossible standard.
Further research is needed to confirm the following:
- There does not appear to be a policy directors holding executive sessions without the CEO present.
- There does not appear to be a policy prohibiting hedging of stock by directors and employees.
Costco 2020: Mark Your Calendar
For a shareholder proposal to be included in the proxy statement for the 2021 annual meeting, it must comply with SEC Rule 14a-8 and be received by the Secretary of the Company, at the address below, no later than August 12, 2020.
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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