Electronic Arts 2021: Gaming Investors

Electronic Arts 2021 proxy claims my proposal for written consent is “unnecessary and moot,” given their proposal on the same topic. But their proposal is a Trojan Horse, meant to deceive investors. They are gaming their investors. This ethical lapse is troublesome, as discussed below.

Electronic Arts 2021 annual meeting is August 12, 2021 (Thursday), 2:00 pm (Pacific). To attend, vote, and submit questions during the Annual Meeting visit here. To participate, you will need the 16-digit control number provided on your proxy card or voting instruction form. Of course, I recommend voting in advance. Enhance long-term value. Vote AGAINST Coleman, Huber, Simonson, Ubinas, Ueberroth, Wilson, Pay, Auditor, and the Board’s Trojan Horse Written Consent proposal. Vote FOR proposal #5, real written consent. 

Electronic Arts Inc. develops, markets, publishes and distributes games, content, and services for game consoles, PCs, mobile phones, and tablets worldwide. Most shareholders do not vote.  Reading through 125+ pages of the proxy takes time but 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 25 years and trust my judgment, skip 7 minutes of reading. See how I voted my ballot. Actual 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.

Electronic Arts 2021: ISS Ratings

Electronic Arts Inc.’s ISS Governance QualityScore as of July 1, 2021, is 9. The pillar scores are Audit: 3; Board: 8; Shareholder Rights: 5; Compensation: 10.

Electronic Arts 2021: Board Proposals

1. Directors

Egan-Jones Proxy Services recommends against 1b) Leonard S. Coleman, (1c) Jeffrey T. Huber, (1e) Richard A. Simonson, (1f) Luis A. Ubinas, (1 G) Heidi J. Ueberroth, and (1h) Andrew Wilson. Several of these directors have served for longer than 10 years, so should not be considered independent. Others are on the Compensation Committee, discussed below. Wilson should not chair the board and be the CEO. That is an obvious conflict of interest, so I voted against him for that reason.

Vote: AGAINST Coleman, Huber, Simonson, Ubinas, Ueberroth, and Wilson.

2. Executive Compensation

Electronic Arts Summary Compensation Table shows the highest paid named executive officer (NEO) was CEO/Chair Andrew Wilson at  $39.2M. I’m using Yahoo! Finance to determine market cap ($40B) and I define large-cap as $10B, mid-cap as $2-10B, and small-cap as less than $2B. 3D Systems is a small-cap company.

According to the latest information from MyLogIQ, the median CEO compensation at S&P 500 companies was $13M. Andrew Wilson would be in the top 10% at $23.9M but he was paid $39.2M. Electronic Arts shares underperformed the Nasdaq by far over the most recent one- two-, and five-year time periods, as well as underperforming the S&P 500. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 316 to 1.

Egan-Jones Proxy Services writes, “This Company has earned a grade of Needs Attention in compensation and thus, has failed to pass our quantitative tests.” Agreed. Since I voted against compensation/pay, I also voted against directors on the compensation committee: Coleman, Ubinas, Ueberroth.

Vote: AGAINST.

3. 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 as the auditor for 34 years. No other issues appear significant.

Vote: AGAINST

4. Trojan Horse Written Consent

53% of shares last year voted for my proposal to allow written consent. When it appeared the Board would not honor that vote, I submitted proposal #5 below. The Board filed a counter-proposal that looks to give shareholders a new right. Unfortunately, it is a deception, like the Trojan horse. The Board’s gift is no gift. It is like naming your company Organica, hoping to confuse customers into thinking your products are organic.

Shareholders are being asked to approve the Amended and Restated Certificate of Incorporation to enable stockholders who comply with the applicable requirements and procedures to act by written consent. Read beyond that headline to the fine print.

The Board’s proposal will require that stockholders seeking to act by written consent must own, individually or in the aggregate, at least 25% of the outstanding shares of common stock to request that the Board of Directors set a record date to determine the stockholders entitled to act by written consent. Most companies allowing shareholders to call a special meeting require no threshold to set a record date.

The 25% ownership threshold to set a record date is the same ownership threshold required for stockholders to call a special meeting, so no one would logically gather written consents instead of calling a special meeting.  When shareholders call a special meeting, they only have to win a majority vote from those voting at the meeting, not a majority of votes from shares outstanding. That makes a huge difference, since many shares are not voted.

Delaware-based boards can add restrictions to holding special meetings by unilaterally changing the bylaws. However, the Delaware Supreme Court ruled that any modification or elimination of the right to written consent must be in the company’s certificate of incorporation, which must be voted on by shareholders. The Court took this action to protect shareholders. (Special Meetings and Consent Solicitations: How the Written-Consent Right Uniquely Empowers Shareholders, beginning page 1736)

When judging whether a company has “good corporate governance,” the focus is often on what rights shareholders are affirmatively given. (note 180) This Note shows that looking only at what rights shareholders are given, and not at the restrictions placed on those rights, produces an overly optimistic picture of how much power shareholders actually have. While a shareholder may nominally have certain rights—and, as a result, the company may be able to portray itself as having a shareholder-friendly corporate governance—the reality may be quite different. …

Contrary to popular opinion, the right to act by written consent is more empowering to shareholders than the right to call a special meeting, because boards cannot unilaterally impose the same type of restrictions on the latter as they can on the former. A review of the corporate governance documents of large Delaware companies demonstrates the significance of this distinction. Boards have, with little oversight or fanfare, significantly restricted shareholders’ exercise of their special-meeting right. However, companies have generally not imposed similar restrictions on shareholders’ exercise of their written-consent right.

In the past, companies faced with a written consent proposal often would include a proposal to lower the special meeting threshold on the proxy in return for the shareholder withdrawing their written consent proposal. In this case, the Board could have offered to lower the special meeting threshold from 25% to 20%. Had they done so, I might have withdrawn my proposal.

Instead, the Electronic Arts Board took a relatively new tactic. Include their own proposal that pretends to offer shareholders the right to act by written consent but that no shareholder will ever use. Then call the shareholder proposal “unnecessary and moot in light of Proposal 4.” The Board’s proposal will become effective quickly, whereas the shareholder proposal will require at least another year to implement.

If the Electronic Arts Board succeeds in fooling shareholders into forclosing their ability to ever use written consent through such deception, how else will they deceive us? Appearing to provide a right that is essentially nonexistent is worse than opposing a real right. Unfortunately, many shareholders, including institutional shareholders, are falling for this Trojan horse.

Vote: AGAINST

Electronic Arts 2021: Shareholder Proposals

5. Real Written Consent

This real corporate governance proposal comes from me, James McRitchie (as it did last year), so of course, I voted FOR. As indicated in the proposal, many boards and investors assume a false equivalency between rights of written consent and special meetings.

However, at most firms allowing written consent, any shareholder, regardless of the number of shares owned, 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. That can take more time and expense. Additionally, management generally places more restrictions on special meetings. See Special Meetings and Consent Solicitations: How the Written-Consent Right Uniquely Empowers Shareholders. The Trojan Horse “right” of written consent removes this advantage and actually forecloses the opportunity of shareholders to ever act by written consent.

The Bank of New York Mellon argued a provision similar to that contained in the Electronic Arts’ false written consent proposal (except requiring 20% not 25% of shares) was equivalent to written consent without such a requirement. Even though the proponent offered no defense, the SEC denied the no-action request as false on its face. Trojan Horse written consent is NOT equivalent to real written consent.

Trojan Horse written consent diminishes the power of shareholders to hold the Board accountable, so will decrease the value of your shares. Genuine written consent creates a more competitive environment. That increases the value of your shares.

Vote: FOR

Electronic Arts 2021: Issues for Future Proposals

Looking at insightia for anti-shareholder provisions:

• No requirement to separate CEO and Chair
• No written consent provisions.

Electronic Arts 2022: Mark Your Calendar

What is the deadline to propose matters for consideration at the 2022 annual meeting of stockholders?

Proposals to be considered for inclusion in our proxy materials: No later than February 25, 2022. All proposals must comply with Rule 14a-8 under the Exchange Act.

Related Posts

Electronic Arts 2020: Vote FOR Written Consent

Warnings

Be sure to vote for each item on the proxy. Any items left blank get automatically 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.” Peer groups are often chosen by aspiration. The “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average.” However, corporations live in the real world. All CEOs are above average. Ignoring that fact partly explains why their collective pay spiraling out of control. We need to slow the pace of money going to the 1% or our economy will fail to serve the majority. The rationale for peer group benchmarking is a mythological market for CEOs. For more on the subject, see CEO Pay Machine Destroying America.