The Big Vote at Deere & Company, plus Arjuna vs. Exxon, duck proxy advice, and Nixon-era directors at O’Reilly Automotive
PROXY COUNTDOWN SCRIPT
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This is Proxy Countdown. Welcome to the big show for the week of February 5, 2024 alongside my tag team partner Matt Moscardi. I'm Damion Rallis. On today’s countdown:
Significant board leadership changes at 3 large cap companies
Is the grim reaper coming for the O’Reilly brothers at O’Reilly Automotive?
Disney uses an animated duck to tell shareholders how to vote
Exxon won’t take “no” for an answer after suing to get “no” for an answer
And on the Big Vote, Matt dives into a midwestern tractor company
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Trade Wire - BUY/SELL
Top Stories:
Let’s begin on our Trade Wire: In significant leadership changes
A big shakeup at Honeywell as CEO Vimal Kapur adds board chair to his LinkedIn resume as former CEO and Chair Darius Adamczyk, and his 29% influence, is set to officially depart from the board.
Also, William Ayer will become the board’s new independent lead director, replacing Scott Davis.
At CF Industries, Christopher D. Bohn has been promoted to COO and added to the board. The board is already dominated by CEO Tony Will and his 25% influence so adding the COO further consolidates executive power there.
And a significant hole will need to be filled at Cadence Design Systems, as long-time Chair and director John Shoven who has been on the board since 1992, when Kurt Cobain was still alive, will be stepping down.
In other notable resignations:
Jay Burchfield, who has been a director since the Clinton Administration, is stepping down at O’Reilly Automotive because of a retirement policy that limits board age to 78. This means the clock is ticking on the O’Reilly brothers, David and Larry, who are 73 and 76 years old, respectively. The O’Reilly brothers have been directors since the Nixon Administration Matt: O’reilly, like most auto parts companies, makes their directors wear matching outfits in their bio pictures - except the newest (and only person of color) Fred Whitfield, who wore a suit. The real question here is: new director - forced to wear baby blue autoworker shirt, or not?
Ray Young resigned from the Hormel Foods Board: “having meaningfully contributed to the Board during his tenure,” according to the filing. The former Vice Chair at Archers-Daniels-Midland, Ray is a heavy hitter with 14% of influence at Hormel and 19% of influence at International Paper. Overall, however, he was hitting just .296
In notable director adds:
Mondelēz International is adding Haleon CEO Brian J. McNamara;
Gilead Sciences is adding Ted Love, who already serves on both the boards of Seagen and Royalty Pharma.
And at Barbie’s Mattel, two new directors have been added to the board: Julius Genachowski, who already serves at Sonos and Mastercard, and Dawn Ostroff who sits on the board of Paramount Global.
And lastly, in an unusual move at a large cap company Microchip Technology is reducing salaries for its CEO, NEOs, and board members by 20% to match other expense reduction actions at the company. While it doesn’t represent a significant reduction, about $19,000 for board members and roughly $130,000 for CEO Ganesh Moorthy, since so many other pay elements of executive pay are tied to base salary it should result in further overall pay reductions. Directors reducing their own pay is a relatively new concept.
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PROXY CAGE MATCH
Moving over to our Proxy Cage Matches:
The Walt Disney Company, who is currently engaged in a 3-way steel cage match between Trian and Blackwell, released an animated video featuring Professor Ludwig Von Drake to tell Disney shareholders how to vote. The gray-haired and balding duck was extremely straightforward:
“Remember it’s important you vote only for Disney’s 12 nominees using the WHITE proxy card”
“Do not vote for the Trian Group or Blackwells nominees.”
Trian meanwhile has been busy filing proxy contestations: one that stood out featured a picture of former CFO and Trian board nominee Jay Rasulo with a quote saying merely: “The Disney I know has lost its way.”
Matt: Is everyone involved in this a child? An animated duck giving proxy voting instructions? 65% of the float is institutional, and on average only 30% of retail votes - so this video is to 10% of your shareholders? Meanwhile, Trian’s strategy is “be Netflix for revenue, but old Disney for Disney stuff”? At this point, my instinct is to vote them all out - every director except maybe James Gorman who just joined.
And in an update to a previous story covered here at The Proxy Countdown, activist investor Arjuna Capital and climate activist Follow This have withdrawn their climate resolution from Exxon Mobil’s upcoming annual meeting after Exxon made the unusual move to sue them.
After the Court stated that it “struggles to see what the ongoing case or controversy is in this matter given the only relief sought from the Court was a declaration that Exxon may exclude Defendants proposal from its annual shareholder meeting," Exxon told a federal judge that the lawsuit should continue.
Matt: This is a terrible look, but not for Exxon - Arjuna, you have a right as an owner to file the proposal, and there are adjudications the SEC makes in that regard - DON’T BACK DOWN.
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VOTE RESULTS TABLE
Moving over to our vote results table:
Let’s start with one notable vote at a smaller cap company:
At Polished.com, a proxy contest by a single investor with 2 shares–Jerald Hammann–failed as Jerald’s bid to be added to the board was rejected by shareholders. Hats off to Mr. 2 Shares, however, as he did receive the support of 20% of the vote.
At large cap companies, the only annual meeting last week occurred at Hormel Foods where nothing notable happened. This year’s most disliked director is Stephen Lacy, who, despite receiving the support of 94% of shareholders, still registered 5 million more votes against his re-election than any other director.
Matt: False! Investors passed another exculpation of directors proposal - more investors voted against Gary Bhojwani (nom chair) and Stephen Lacy (comp chair) than voted against exculpation, which allows, say, Gary Bhojwani and Stephen Lacy to basically ignore parts of their fiduciary duty and not get sued
Of note at smaller cap companies
Say on Pay failed at Enzo Biochem
Hamid Erfanian was CEO for less than 2 years and managed to walk away with: i) nearly $1 million in cash; (ii) a grant of restricted shares worth $1,502,488; and (iii) the immediate vesting of 173,333 restricted shares and 700,000 options.
While there were 21 million votes against Pay; two Pay Committee members somehow managed to receive 9 million more votes in their favor.
Matt: Is there any more passive aggressive move than a majority vote against PAY but still re-electing the DIRECTORS THAT SET PAY? Like every investor is Tony Soprano’s mom when it comes to voting against directors instead of pay?
Laziness wins at Moog as shareholders determined that Say on Pay votes should be held only every three years, and not annually, which is the custom.
And finally a PSA that we need to immediately ban Staggered board elections: shareholder votes at BellRing Brands, Digi International, Twist Bioscience, and Golub Capital BDC all showed signs of disgruntled shareholder voters and it is forever stupid that they can’t have say on the entire board every 12 months
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THE BIG VOTE
Deere
AGM Date: February 28, 2024
General Observations
Ownership
Institutional voting power
Cascade 8%
Director Alan Heuberger
Vanguard 8%
BlackRock 7%
Performance outliers:
Overall: .594
Most in middle range
EBITDA .495
Sheey Smith .221
Tamra Erwin .640
Carbon .553
Most in middle range
TSR .616
Leanne Caret .911
Sherry Smith .473
Controversies .676
Sherry Smith .932
Board stuff
Charles Holliday (Lead Director) retiring
Sherry Smith, second longest serving director (since 2011) is becoming Lead Director
Hunn new
Alan Heuberger represents shareholder Cascade
About $300k+ per director
Retirement policy at 75
Clayton Jones 74
Michael Johanns 73
Gregory Page 72
Sheila Talton 71
Woke: DEI has a global DEI strategy; “we believe that a diverse workforce is essential to our long-term success”
Skills matrix: only category with 100% is “Executive”
Lowest are manufacturing (36%), agriculture (36%), and government/academic (18%)
Proposal 1: Election of 11 Directors
Annual Elections for ALL directors? YES
Director Slate
Leanne G. Caret 2021/57/f 2% A
Known for: Retired EVP, Boeing Company and former CEO, Boeing Defense, Space & Security
Other Public Company Directorships: Raytheon Technologies
Previously: none
Votes Against Last AGM: less than 1%
Tamra A. Erwin 2020/59/f 6% cn
Known for: Retired Senior Advisor, Verizon Communications
Other Public Company Directorships: F5, Inc.
Previously: none
Votes Against Last AGM: 2%
Alan C. Heuberger 2016/50/m 11% a
Known for: Senior Investment Manager, Cascade Asset Management
Other Public Company Directorships:
Previously: none
Votes Against Last AGM: less than 1%
L. Neil Hunn 2023/51/m 6% c
Known for: CEO, Roper Technologies
Other Public Company Directorships:
Previously: none
Votes Against Last AGM: na%
Michael O. Johanns 2016/73/m 10% cn
Known for: Retired U.S. Senator from Nebraska and former U.S. Secretary of Agriculture
Other Public Company Directorships: Corteva (since 2019)
Previously: none
Votes Against Last AGM: 2%
Clayton M. Jones 2007/74/m 14% Na
Known for: Former CEO/Chair Rockwell Collins
Other Public Company Directorships: Motorola Solutions
Previously: Cardinal Health
Votes Against Last AGM: 6%
John C. May 2019/54/m 20%
Known for: CEO/Chair Deere
Other Public Company Directorships: Ford Motor Company
Previously: none
Votes Against Last AGM: 6%
Gregory R. Page 2013/72/m 8% a
Known for: Chair Corteva; former CEO/Chair Cargill
Other Public Company Directorships: Corteva (since 2019); Eaton Corporation; 3M Company
Previously: none
Votes Against Last AGM: 7%
Sherry M. Smith 2011/62/f 13% a
Known for: Former CFO SuperValu
Becoming Lead Director
Other Public Company Directorships: Anywhere Real Estate; Piper Sandler Companies
Previously: Tuesday Morning Corp.
Votes Against Last AGM: 4%
Dmitri L. Stockton 2015/59/m 8% C
Known for: Retired Special Advisor to Chairman and Senior VP, GE and Former Chair/CEO, GE Asset Management
Other Public Company Directorships: Ryder System; Target Corporation; WestRock Company
Previously: Stanley Black & Decker
Votes Against Last AGM: 3%
Sheila G. Talton 2015/71/f 5% cn
Known for: CEO, Gray Matter Analytics
Other Public Company Directorships: OGE Energy; Sysco Corporation
Previously: Wintrust Financial Corporation
Votes Against Last AGM: 2%
MATT:
First let’s start with the overview:
Big ag + technology vehicles
Outperformed the S&P YTD, 1 YR, 2 YR, 5 YR
Annual dividend 1.53%, solid cash flow
Ongoing buyback because of course
Right to repair lawsuits (law changed in Jan 2023, lawsuits still pending from 2022)
Strike in 2021 (10,000 workers, settled in November 2021), UAW lead
Team Stats:
High performing - .594 team, Aristocratic board (highly educated and experienced/executives)
High TSR, High EBITDA team
Highly interconnected - 55% of the board is connected, 67% from one board community - the Midwest Mafia (mostly manufacturers, mostly Chicago area, American widget makers, manufacturers, pharma)
American Board Royalty since at least 1998, when I stopped going backwards:
Midwest Mafia: Abbott Labs, Cardinal Health (at least one director from Cardinal contiguously for the last 25 years), Archer Daniels Midland, Snap-on Inc (multiple), Maytag (Whirlpool), Northern Trust, SC Johnson, United Airlines, 3M, Cargill, AlliedSignal/Honeywell
Drug Connections: CR Bard, Schering-Plough (from late 90s to early 00s, at least 3-4 directors), Amgen
Big Dogs: Pepsi, Northrop Grumman, Merrill Lynch, Shell, BofA, BMW (multiple over multiple years)
Proxy strategy:
This isn’t a “vote out the outlier” board - this is more a question of “plan for the future” a la Apple
The question I wanted to answer: is this an Ag company or a Tech company?
Future plans announced include autonomous farming vehicles, data collection (field readiness, moisture, weather - all sorts of data), alternative powered vehicles (EV, hybrid, other), AI farming
Macro trend: vertical farming expected to be a $10bn business by 2026, $35bn by 2032; regenerative agriculture is necessary given climate change, water management challenges
So WHO is going to give the company guardrails for a future with less water, more indoor and vertical farms, and more automation?
Starting point:
Skills matrix is notoriously make believe, but only 4 of the 11 person board has ag experience (one of whom is the investor - Alan Heuberger - from Cascade because he INVESTS in farmland, not… you know, farms), and only 4 of the 11 have manufacturing experience (1 of whom retired from manufacturing in 2013)
Only two directors have experience in both manufacturing and ag - and it’s the CEO of Deere, John May, and director Greg Page
Page is 72 years old and has been on the board for 11 years
The retirement policy for Deere’s board is 75, in the next four years, four directors will be replaced: Clayton Jones (74, 17 year tenure), Michael Johanns (73, 9 year tenure), Greg Page (72, 11 year tenure), Sheila Talton (71, 9 year tenure, also a “twofer” as a black woman)
On top of that, Sherry Smith is NOT close to retirement but has been there for 13 years - so you have FIVE of ELEVEN directors that are refreshment targets for the next couple cycles
And Deere is sticking to tried and true so far…
Evidence they’re not pivoting:
The newest director, Neil Hunn, is part of the old crowd - CEO of Roper Technologies, his board has on it… BofA (Holliday, just retired), AlliedSignal/Honeywell, GE (Stockton) - all connections to Deere
In 2020, they added Tamra Erwin, a marketing executive from Verizon - on Verizon’s board is Shellye Archambeau of MetricStream, who is also on Roper board… alongside Roxanne Austin from the Abbott, Target boards
In 2021, they added Leanne Caret, an exec from Boeing, who’s connected to everyone - Caret on the board of Raytheon with ex-Rockwell Collins CEO (Clayton Jones successor)
According to their skills matrix, they’ve added three directors with tech experience - but none have experience in AgTech, automation, AI, any of the target growth areas
Why skills for future proofing matters:
You need an AI or tech-focused executive at the front edge of tech - not traditional Aerospace (Boeing, Rockwell Collins) - that aren’t cozy with the existing culture and infrastructure (all of them)
We did a “true independence” test - eliminate directors that are connected through other directors on 1st or 2nd degree boards, that have tenure less than 10 years, and that have independent skills relative to both the company’s sub industry and other directors, and have independent educational backgrounds (ie, they didn’t all go to Stanford), and diversity (not all white guys) - with the Deere board
Eliminate the CEO
Tenure cap eliminates three directors (more than 10 years)
The director connections eliminated three more
The independent skills eliminates one more (Aerospace overlap)
Diversity count is two white women, one black woman, one white guy
Result: out of 10 “independent directors”, we had FOUR that might be actually independent
Final recommendation:
Engage to replace the nominating committee chair, Clayton Jones, who’s retiring next year by bylaw anyway, and ask that Michael Johanns step off the committee as well as he’s one more year away - both are highly connected, you need the committee run by the four “true” independent directors ideally
Vote FOR all directors this year, noting that next year you vote OUT Sherry Smith and Greg Page next year to be replaced by a director with AI/tech experience and an actual farmer
Proposal 2: Auditor
Deloitte & Touche
95% YES 2023
Proposal 3: Say on Pay
93% YES in 2023
Improvements
The Committee discontinued the use of the long-term incentive cash (LTIC) plan for performance periods beginning in fiscal 2024 and approved having the long-term incentive component of compensation be 100% in the form of equity for our executive officers
Slightly greater emphasis on performance-based LT equity in 2024: 50% (40% in 2023) PSUs, 25% RSUs, and 25% (35% in 2023) stock options
For fiscal 2024 LTI base level equity awards, the Committee approved a performance adjustment factor range of an increase or decrease of up to 20% (from a prior range of an increase up to 30%)
Dumb
Base salary increases for NEOs
increased the Short-Term Incentive (STI) Bonus Plan limit on the amount payable to a participant in a plan year, which had not been updated since 2005, to $10.0 million from $5.0 million
For fiscal 2023, CEO May’s target STI rate was increased to 200% from 180%
Sneaky raise: salary+STI $4.2M to $4.8M at target and 8.4M to 9.6M at 200% performance modifier maximum
Long-term award: Threshold SVA Required for Payout remains steady at 5 million for past 3 years
TSR modifier pays out 75% “At or below 25th percentile”
LT target award is essentially discretionary: “recommendations are based upon execution and progress on pre-established objectives that may include quantitative and qualitative targets
Perks include $154k for CEO jet
Total CEO pay 2023: $26.7M (up from $20.3M in 2022)
Matt:
For point of reference - the 2023-24 basketball season's 25th percentile points performer is Reggie Bullock. Never heard of him? That's because HE'S THE 25TH PERCENTILE IN POINTS. Bullock makes $2m on his current contract - we should make the floor not 75% the TSR modifier, but total pay equal to Reggie Bullock, the 25th percentile performer - $2m is more than fair.
Also, Bullock’s jet allotment happens to be $0
SHPs
2023 Results
Termination Pay
John Chevedden
41% FOR
2024 SHPs
Proposal No. 4 - Customer and Company Sustainability Congruency Report
National Legal and Policy Center
Matt: Baaahahahahaha - “Deere and Company (“Company”), best known for its heavy machinery products powered by fossil fuels, has long enjoyed – and still maintains – a core customer base of which the majority consists of three major industries: agriculture, forestry and construction/mining.”
“The Company’s perception of the “science” and its approach to “solutions” are both deeply flawed, and severely damage the farm, forestry, and construction/mining sectors. The expansion of costly wind and solar energy require massive swaths of land, much of which is converted from agricultural use or necessitates clear-cutting of forests.”
So they’re admitting we need to buy more Deere products to clear cut the forests, and use Deere’s products to mine for stuff for solar and wind??
Proposal No. 5 - Civil Rights, Non-Discrimination, and Return to Merit Audit
National Center for Public Policy Research
Matt: Always a fun twist - here’s the quote: “In developing the audit and report, the Company should consult civil-rights and public-interest law groups, but it must not compound error with bias by relying only on left-leaning organizations. It must consult groups across the spectrum of viewpoints, including right-leaning civil rights groups representing people of color – such as the Woodson Center or Project 21 – and groups that defend the rights and liberties of all Americans.”
All citations are to… basically themselves
Proposal No. 6 - Shareholder Ratification of Golden Parachutes
John Chevedden
Matt: Vote FOR - as a point of philosophy, why do we pay a CEO for quitting in the first place? When I quit from MSCI, they didn’t say “thank you for your service, here’s a few years’ salary as a toke of our appreciation.” In no job - not sports, not entertainment, not every other position at Deere - would someone get this in the first place. I get instant vesting in change in control, but just straight cash? How does this entice the right kind of people in future - wouldn’t they just be stoked they get paid no matter what? 75% of pay for being the worst company! Paid for leaving! Let shareholders decide whether a CEO earned an outgoing bonus.
DAMION:
That’s the Proxy Countdown for the week of February 5, 2024. Join us next week when we jump back into the Alternative Democracy pool... forever on the lookout for shareholder sharks, floating bandaids, and wayward directors.
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