Caterpillar 2020

Caterpillar 2020: Written Consent

Caterpillar 2020 annual meeting is 6/10/2020 at 6AM Pacific virtually by entering the eligible shareholder’s 16-digit control number found on the proxy card. To enhance corporate governance and long-term value: Vote AGAINST Dickinson, Rust, Osborn, White, Reed-Klages, Wilkins, Schwab, Auditor, Pay. Vote FOR Report Lobbying, Independent Board Chair and Written Consent.  See list of all virtual-only meetings maintained by ISS.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Reading through almost 70 pages of the proxy takes too much time for most. 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 9 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 25% 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.

Caterpillar 2020: ISS Ratings

From the Yahoo Finance profile: Caterpillar Inc.’s ISS Governance QualityScore as of December 6, 2019 is 6. The pillar scores are Audit: 1; Board: 10; Shareholder Rights: 4; Compensation: 5. 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 the board.

Caterpillar 2020 Proxy Voting Guide: Board Proposals

1. Caterpillar 2020 DirectorsEgan-Jones

Egan-Jones Proxy Services recommends Against Daniel M. Dickinson, Edward B. Rust Jr., William A. Osborn, Miles D. White, Debra L. Reed-Klages and Rayford Wilkins Jr.  The first three have served for 10 years or more is considered affiliated, except for diverse nominees. They believe that key Board committees namely Audit, Compensation and Nominating committees should be comprised solely of Independent outside directors for sound corporate governance practice. The second three sit on Compensation Committee and have recommended pay that needs attention, so should be held accountable. In addition, voted Against Susan C. Schwab who has also served for more than 10 years and serves on the Nominating committee.

Vote: AGAINST Dickinson, Rust, Osborn, White, Reed-Klages, Wilkins and Schwab.

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

mylogiq_logoCaterpillar’s Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair D. James Umpleby III at $16.4M. I’m using Yahoo! Finance to determine market cap ($73.7B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Union Pacific is a large-cap company.

According to MyLogIQ, the median CEO compensation at large-cap corporations was $12.2M in 2019. Caterpillar shares have substantially underperformed during the last one, two and five year time periods. Perhaps I need to reevaluate why I own it. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 531:1.

Egan-Jones Proxy Services recommends Against and writes:

We believe that shareholders cannot support the current compensation policies put in place by the Company’s directors. Furthermore, we believe that the Company’s compensation policies and procedures are not effective or strongly aligned with the long-term interest of its shareholders.

Given above median pay, sustained underperformance, E-J’s recommendation and my general concerns about inequality…

Vote: AGAINST

Caterpillar 2020 Shareholder Proposals

4. Report Lobbying Activities

This good governance proposal comes from Fonds de solidarite des travaileurs du Quebec (FTQ), a union created development fund. The requested report would disclose policies, procedures and expenditure, including membership dues.  As noted in my proposal asking for political contributions to be disclosed at Netflix:

In its much despised 2010 Citizens United decision, which removed limits on corporate political spending, Judge Kennedy was not worried about the corrupting influence of corporate money because he thought such expenditures were reported. Here’s two of his sentences from that decision:

With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable… Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.

Unfortunately, much of the data Judge Kennedy assumed to be public is not public. This proposal, like simlar proposal seeking disclosure of campaign contributions, simply seeks to fill that gaps. Dark money is everywhere, trying to influence our elected representatives. E-J sees such reports as an unnecessary expense. I disagree. Nothing could be more critical to continuing our government’s great experiment in democracy.

Vote: FOR

5. Independent Board Chairman

This good governance proposal comes from John Chevedden. I voted FOR. An independent Chairman is best positioned to build up the oversight capabilities of our directors while our CEO addresses the challenging day-to-day issues facing the company. 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.

Recently shareholders voted a majority of shares in favor of a similar proposal at Boeing.

Egan-Jones writes For:

We believe that there is an inherent potential conflict, in having an Inside director serve as the Chairman of the board. Consequently, we prefer that companies separate the roles of the Chairman and CEO and that the Chairman be independent to further ensure board independence and accountability.

Vote: FOR

6. Writte Consent

This good governance proposal comes from my wife and I (Myra Young and James McRitchie), so of course I voted FOR. 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 CAT, which allows only investors with 25% of outstanding shares to call a special meeting, instead of 10%, as allowed by many companies.

Similar proposals won more than 50% of the vote recently at Stanley Black & Decker, Berry Global Group, Flowserve, JetBlue, United Rentals, Capital One, Cigna, Applied Materials and Nuance.

Egan-Jones recomments FOR.

Vote: FOR

Caterpillar 2020 CorpGov Recommendations

Looking up a few funds announcing votes in advance, NYC Pensions voted FOR all items except Calhoun and Schwab. CBIS and Australia’s Local Government Superannuation Scheme voted FOR all items except Auditor. Calvert voted FOR all items except Exec Pay and Independent Board Chair. 

CorpGov Votes:

  1. Directors: AGAINST Dickinson, Rust, Osborn, White, Reed-Klages, Wilkins and Schwab.
  2. Auditor: AGAINST
  3. Executive Pay: AGAINST
  4. Report Lobbying: FOR
  5. Independent Board Chair: FOR
  6. Written Consent: FOR

Caterpillar 2020: Mark Your Calendar

If the proposal is to be included in our proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the proposal must be received at the office of the Corporate Secretary on or before January 1, 2021.

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.

   

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