Pegasystems 2020: Simple Majority Vote

Pegasystems 2020 annual meeting is 6/23/2020 at 7AM Pacific virtually. They are using Computershare, so shareholders holding in street name have to get a legal proxy and submit it by June 18th. Since my broker sends those by snail mail, I would have had to initiate the process by about June 8. Pegasystems says that will allow you to vote at the meeting but it makes no mention of any ability to ask questions. To enhance long-term value: Vote AGAINST Jones, Gyenes, Trefler, Pay, Incentive Plan and Auditor. Vote FOR #4 Simple Majority Vote. See list of all virtual-only meetings maintained by ISS.

Pegasystems Inc. develops, markets, licenses, and supports enterprise software applications in the United States, rest of the Americas, the United Kingdom, rest of Europe, the Middle East, Africa, and the Asia-Pacific. Reading through the whole 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 8 minute read. See how I voted in my ballot. Voting will take you only a minute or two. Every vote counts. Even though insiders control the company, our votes at least send an important signal.

I voted with the Board’s recommendations 58% 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.

Pegasystems 2020: ISS Ratings

From the Yahoo Finance profile: Pegasystems Inc.’s ISS Governance QualityScore as of June 12, 2020 is 4. The pillar scores are Audit: 2; Board: 5; Shareholder Rights: 3; 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 the board and compensation.

Pegasystems 2020 Proxy Voting Guide: Board Proposals

1. Directors

Egan-Jones Proxy Services recommends Against (Withhold) 1A) Alan Trefler, 1B) Peter Gyenes, 1D) Richard Jones Mr. Trefler should not be considered independent, since he holds both the CEO and chair positions. Additionally, E-J identified cybersecurity issues, which the CEO should be held accountable for. The other two directors have served for 10 years or more, so should no longer be considered independent nor should they serve on compensation, audit or nominating committees.

Vote: AGAINST Jones, Gyenes, Trefler.

2. Executive Compensation

Pegasystems 2020 Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Alan Trefler at $5.9M. Market cap is about $7.8B. I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. Pegasystems is a mid-cap company.

According to MyLogIQ, the median CEO compensation at mid-cap corporations was $6.6M in 2019. Pegasystems shares outperformed 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 46:1.

Egan-Jones Proxy Services writes:

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 slightly below median pay, good performance and what seems like a reasonable lpay ratio, I voted FOR.

Vote: FOR

3. Long-Term Incentive Plan

Egan-Jones:

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.

However, Calvert voted Against. Here’s their rationale:

The plan’s dilution exceeds 10 percent. Based on evaluation of the estimated cost, plan features, and grant practices using the Equity Plan Scorecard (EPSC), a vote AGAINST this proposal is warranted due to the following key factors:- The plan permits cash buyout of awards without shareholder approval (overriding factor);- The equity program is estimated to be excessively dilutive (overriding factor);- The plan cost is excessive;- The disclosure of change-in-control (“CIC”) vesting treatment is incomplete;- The plan permits liberal recycling of shares; and- The plan allows broad discretion to accelerate vesting.

Vote: AGAINST

5. Ratification of Independent Auditor

Note I skipped down to number 5, since it is also a Board proposal. 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. Deloitte & Touche, LLP has served more than seven years. No other issues appear significant.

Vote: AGAINST

Pegasystems 2020 Shareholder Proposals

This good governance proposal comes from me (James McRitchie), so of course I voted FOR. Large funds, such as T. Rowe Price, BlackRock, SSgA and Northern Trust generally support elimination of supermajority requirements, since most view them as an entrenchment device for management. For example, BlackRock’s Proxy Voting Guidelines for U.S. Securities includes the following:

We generally favor a simple majority voting requirement to pass proposals. Therefore, we will support the reduction or the elimination of supermajority voting requirements to the extent that we determine shareholders’ ability to protect their economic interests is improved.

Egan-Jones writes:

We believe that a simple majority vote will strengthen the Company’s corporate governance practice. Contrary to supermajority voting, a simple majority standard will give the shareholders equal and fair representation in the Company by limiting the power of shareholders who own a large stake in the entity, therefore, paving way for a more meaningful voting outcome.

Vote: FOR

Pegasystems 2020 CorpGov Recommendations

Proxy Insight may report votes before the deadline.  Looking up a few funds announcing votes in advance, NYC Pensions voted FOR all items except the Incentive Plan and Simple Majority Vote. Calvert voted AGAINST all items except Trefler and the Auditor

CorpGov Votes:

1. Directors: AGAINST Jones, Gyenes, Trefler.
2. Executive Pay: FOR
3. Long-Term Incentive Plan: AGAINST
4. Simple Majority Vote Standard: FOR
5. Auditor: AGAINST

Pegasystems 2020: Mark Your Calendar

If you are interested in submitting a proposal for inclusion in the proxy statement for the 2021 Annual Meeting, you need to follow the procedures outlined in Rule 14a-8 under the Exchange Act and in our Amended and Restated Bylaws. To be eligible for inclusion, we must receive your stockholder proposal intended for inclusion in the proxy statement for the 2021 Annual Meeting of Stockholders at our principal corporate offices in Cambridge, Massachusetts as set forth below no later than 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.