IBM 2020: Removal Only “For Cause”

IBM 2020 annual meeting is 4/28/2020, 7AM Pacific. To attend the virtual Annual Meeting, please visit: www.meetingcenter.io/244134877.  To vote at the meeting, login with your unique 15-digit control number. To enhance long-term value: Vote AGAINST Michael L. Eskew, Andrew N. Liveris, Alex Gorsky, Martha E. Pollack, Joseph R. Swedish, Virginia M. Rometty, Sidney Taurel, Auditor, and Pay. Vote FOR Shareholder Right to Remove Directors, Written Consent, Independent Board Chair. Virtual meeting link. List of all virtual meetings kept by ISS.

IBM argues shareholders should only be able to remove directors “for cause,” which essentially means for committing crimes. Underperformance for 1, 2, 5 years should not be a reason for removal nor should other measures not involving criminal activity. If IBM were incorporated in Delaware, they would have to provide the right of shareholders to remove directors even if they have not engaged in criminal behavior. This year, I requested several companies incorporated outside Delaware to allow removal of directors without cause. IBM was the only company to refuse the request.

International Business Machines Corporation (IBM), operates as an integrated solutions and services company worldwide. Reading through 90 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 37% 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.

IBM 2020: ISS Ratings

From the Yahoo Finance profile: International Business Machines Corporation’s ISS Governance QualityScore as of December 4, 2019 is 6. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 3; Compensation: 9. 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 the Board. Sustainability scores are about average.

IBM 2020 Proxy Voting Guide: Board Proposals

1. IBM 2020 Directors

Egan-Jones Proxy Services recommends Against Michael L. Eskew, Andrew N. Liveris, Alex Gorsky, Martha E. Pollack, Joseph R. Swedish, Virginia M. Rometty, and Sidney Taurel. These directors have served for 10 years or more and so are no longer independent, or are in the compensation committee and must be held accountable for poor practices. Virginia Rometty should not be CEO and Board Chair, and has failed to adequately address cybersecurity issues,  according to Egan-Jones’ Proxy Guidelines.

Vote: AGAINST Michael L. Eskew, Andrew N. Liveris, Alex Gorsky, Martha E. Pollack, Joseph R. Swedish, Virginia M. Rometty, and Sidney Taurel.

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

Vote: AGAINST

3. Executive Compensation

IBM 2020 Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Virginia M. Rometty at $20M. I’m using Yahoo! Finance to determine market cap ($94B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. IBM is a large-cap company.

According to MyLogIQ , the median CEO compensation at large-cap corporations was $12.5M in 2019. IBM shares underperformed during the last 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 354 to 1.

Egan-Jones Proxy Services recommends against the pay package. Given poor relative performance, higher than median pay and a high pay ratio, I voted against.

Vote: AGAINST.

IBM 2020 Shareholder Proposals

This good governance proposal, which allows shareholders to remove directors without cause, comes from me. Of course I voted FOR. E-G also recommends FOR. Demonstrating cause, if required to remove directors as is the case at IBM, is next to impossible absent a clear showing of illegal or wrongful conduct.

In Delaware, where many corporations are incorporated, shareholders have the right to remove annually elected directors without cause by a majority vote of the outstanding shares. Specifically, Section 141(k) of the Delaware General Corporation Law provides that “any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors,” subject to exceptions that only apply to corporations with classified boards or cumulative voting. As a result, shareholders of Delaware corporations are capable of exerting some degree of pressure on annually elected boards with their ability to seek to remove directors, without the need to show cause, especially if they are also permitted to call special meetings or take action by written consent for such purpose.

IBM allows shareholders to call special emergency meetings. The typical reason for doing to is to remove and replace members of the Board. Delaware law requires such rights for companies, like IBM, that have declassified their Board. Other companies where I submitted this measure, simply agreed to implement the proposal (State Street, S&P Global, Johnson & Johnson). I was very surprized to see IBM simply oppose without even discussing it with me. Egan-Jones recommends FOR.

Vote: FOR

5. Shareholder Proposal: Right to Act by Written Consent

This good governance proposal comes from well known shareholder advocate John Chevedden. Many boards and investors assume a false equivalency between rights of written consent and special meetings. However, any shareholder, regardless how many (or few) shares she owns, can seek to solicit written consents on a proposal.

By contrast, calling a special meeting may require a two-step process. A shareholder who does not own the minimum shares required must first obtain the support of other shareholders. Once that meeting is called, the shareholder must distribute proxies asking shareholders to vote on the proposal to be presented at the special meeting. This two-step process can take more time and expense than the one-step process of soliciting written consents, especially at IBM, which allows only investors with 15% of outstanding shares to call a special meeting, instead of 10%, as allowed by many companies.

E-J recomments FOR.

Vote: FOR

6. Shareholder Proposal: Independent Board Chair

This good governance proposal comes from well known shareholder advocate Kenneth Steiner. The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person. There should be a clear division of responsibilities between these positions to insure a balance of power and authority on the Board. E-J believes “there is an inherent potentional conflict in having an Inside director serve as the Chairman of the board.” They recommend FOR.

Vote: FOR

IBM 2020 CorpGov Recommendations

Proxy Insight had recorded the following votes in advance of the meeting when I last checked: 

IBM Early Votes Captured by Proxy Insight

They may have updated by the time I post this. Looking up other funds announcing votes in advance, NYC Pensions voted FOR all items except Michael L. Eskew, who they voted AGAINST. 

CorpGov Votes:

1. Directors: Michael L. Eskew, Andrew N. Liveris, Alex Gorsky, Martha E. Pollack, Joseph R. Swedish, Virginia M. Rometty, and Sidney Taurel.
2. Auditor: AGAINST
3. Executive Pay: AGAINST
4. Right to Remove Directors: FOR
5. Right to Act by Written Consent: FOR
6. Independent Board Chair: FOR

IBM: Issues for Future Proposals

• No ability for shareholders to at by Written Consent (requires universal vote in favor, not majority)
• 25% to call for a Special Meeting
• No prohibition against directors or employees hedging company stock

IBM 2021: Mark Your Calendar

Stockholder proposals may be submitted for IBM’s 2021 proxy material after the 2020 Annual Meeting and must be received at our corporate headquarters no later than November 9, 2020. Proposals should be sent via registered, certified or express mail to: Office of the Secretary, International Business Machines Corporation, 1 New Orchard Road, Mail Drop 301, Armonk, NY 10504.

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.