Top and bottom director performance, plus Southwest’s proxy fight and director perks
PROXY COUNTDOWN SCRIPT
<THEME MUSIC>
This is Proxy Countdown. Welcome to the big show for the week of July 15, 2024 alongside my tag team partner Matt Moscardi. I'm Damion Rallis. On today’s countdown:
Southwest directors treated like royalty
Southwest directors who are treated like royalty do whatever it takes to support the hand that feeds them
Two ousted directors at Kirkland’s
Nobody likes Marc Benioff’s pay at Salesforce
And on The BIg Vote, a look back at the 2024 proxy season, including some of Matt’s best voting recommendations
<TRADE WIRE BUMPER>
Trade Wire - BUY/SELL
Top Stories:
At DuPont, the company’s new CEO, Lori D. Koch, who has been CEO since June 1, 2024, was appointed to board on June 27, 2024, meaning that it is technically possible that the board of a large cap US company can operate and survive without the presence of a meddling CEO.
At LKQ, Dominick Zarone ceased serving as the company’s CEO on June 30, 2024 at which point he was given the title of an Executive Advisor in order to facilitate an orderly chief executive officer transition. He will stay in this new made up role until December 31, 2024 and get paid exactly as he would as the CEO. Considering Dominick earned about $12 million last ear, he could have saved shareholders $6 million by onboarding the new CEO while he was still in office like most normal people. Something tells me that Justin Jude, who has been with LKQ since 2004, most recently as COO, could have handled a more expedient transition. Oh well.
At Southwest Airlines, where the board has dedicated itself recently to more robust director refreshment, we have often wondered out loud why the board is so consistently old and long-tenured. Well, a filing announcing the appointment of new director Rakesh Gangwal, the co-founder of India’s largest airline InterGlobe Aviation, and the former CEO at US Airways Group, might have finally revealed the mystery. Listen to some of this ridiculous director perks at Southwest Airlines:
an annual retainer consisting of (a) $90,000 cash, (b) $170,000 equity, (c) $1,500 for each meeting in excess of regularly scheduled Board and Committee meetings; and (d) eligibility for a retirement payment under the Southwest Airlines Severance Plan for Directors (which provides for a cash payment of $35,000 for Directors who have served at least five years as of the date of retirement and $75,000 for Directors who have served at least ten years as of the date of retirement).
Wait, there’s more! free travel on Southwest Airlines for the Director, the Director's spouse, and the Director's children, as well as 50 one-way flight passes annually that may be used for free travel on Southwest Airlines on an unrestricted basis, and an additional 50 one-way flight passes annually for use by qualified charitable and non-profit organizations;
And then after they step down from the board: (a) 50 one-way flight passes annually that may be used for free travel on Southwest Airlines on an unrestricted basis for a term equal to the number of years served; and (b) if the Director has served at least ten years, a lifetime privilege of 50 one-way flight passes annually that may be used for free travel on Southwest Airlines on an unrestricted basis;
As well as (a) if the Director has served at least ten years, lifetime free travel on Southwest Airlines for the Director and the Director’s spouse; (b) if the Director has served less than ten years, free travel on Southwest Airlines for the Director and the Director’s spouse equal to the number of years served; and (c) if the Director is deceased, free travel on Southwest Airlines for the Director’s spouse for the lifetime of the spouse
And finally, at Gartner, CEO and Chair Eugene A. Hall has extended his employment agreement through December 31, 2031. Now there’s a cool reason why the CEO might also want to Chair the board which decides his contract and pay.
<PROXY CAGE MATCH BUMPER>
PROXY CAGE MATCH
Southwest Airlines has adopted a shareholder rights plan, more commonly known as a “poison pill,” in response to activist Elliott Management’s investment in the airline and push to oust CEO Bob Jordan and Chairman Gary Kelly.
The poison pill will only activate if Elliott, which disclosed in June that it had amassed a $1.9 billion stake, or about 11% of Southwest — or another investor — acquires at least 12.5% of the company. If that threshold is crossed, all other shareholders will be entitled to purchase one new Southwest share for every share they currently own at a 50% discount.
Such a provision would dilute Elliott’s influence and power over voting. Companies often adopt shareholder rights plans in response to an activist threat.
Southwest’s board backed the company’s leadership after Elliott disclosed its stake. Jordan said last month he has no plans to resign.
Best practices would suggest that shareholders need to approve these poison pill plans, and not a board trying to protect its CEO
<VOTE RESULTS BUMPER>
VOTE RESULTS TABLE
Moving over to our vote results table, here are some of the highlights over the past few weeks:
At Kirkland’s
53% NO: Steven J. Collins and R. Wilson Orr, III
“As reported below, Steven J. Collins and R. Wilson Orr, III did not receive a majority of the votes cast for their nominations as directors at the Kirkland’s, Inc. (the “Company”) Annual Meeting of Shareholders (the “Annual Meeting”). Mr. Collins and Mr. Orr tendered their resignation as directors in accordance with the Company’s Majority Voting Policy in the Company’s Charter and Corporate Governance Guidelines, with the effectiveness of such resignation being conditioned upon the Board of Directors’ acceptance of such resignation.
Following deliberations, on June 26, 2024, the Board of Directors voted to accept the resignations of Mr. Collins and Mr. Orr, effective immediately. In addition, the Board of Directors appointed Ann E. Joyce as Chair of the Board and voted to reduce the size of the Board of Directors from eight to six directors.
Neither Mr. Collins or Mr. Orr participated in the discussions or deliberations by the Nominating and Governance Committee or the Board of Directors regarding their tendered resignations or future service as director.”
At Salesforce: Say on Pay failed 55% NO
Despite this, only 21% want to potentially counterbalance the power of CEO by calling for an independent board chair
Pay Committee (Chair John V. Roos 93%; Neelie Kroes 98%; Craig Conway 96%)
Target Value of Fiscal 2024 Long-Term Equity Incentive Awards $15M; Target Value of Fiscal 2025 Long-Term Equity Incentive Awards $43.5M
SHP requesting stockholder approval of certain executive severance arrangements (John Chevedden) 5% YES
About 20% against Benoit Dageville and Mark S. Garrett
SHP declassification (James McRitchie) 78% YES
Stockholders approved a stockholder proposal to replace the supermajority voting provisions in our charter and bylaws with a simple majority voting standard. 89% YES (John Chevedden)
<THE BIG VOTE BUMPER>
THE BIG VOTE
Damion Observations
Matt’s big wins?
At Abbott Laboratories, Matt's recommendation to vote against Nomination Committee chair John Stratton was a good one, as 26% of voters agreed. As a caveat, however, 28% voted against him in 2023. So maybe this is a loss?
Matt was concerned about Stratton’s extensive links to Abbott’s past
At Norfolk Southern, Matt rightly called for the removal of Amy Miles, who got 64% against.
He also called FOR the election of dissident directors Bill Clyburn Jr (62%FOR) and Sameh Fahmy (63%FOR) while barely missing on Allison Landry (49.3%FOR)
However, partial credit to me for loudly advocating against Nominating Committee Chair Jennifer Scanlon (54% NO)
And at Disney, he wisely said a BIG NO on Maria Elena Lagomasino (37%), Nelson Peltz (69%), and Jay Rasulo (88%)
Matt Observations
Matt:
OVERALL:
5,933 votes in 2024 to date in our data
Out of them, 13 directors got less than 50% of the vote - at 10 companies - so investors just hated 10 companies out of the 2,600 proving everyone IS IN FACT ABOVE AVERAGE
122 got less than 75% votes
675 - 11% - of directors got less than 90% votes FOR
The average US vote was 95.32%, the median was 97.46%
TOP AND BOTTOM PERFORMERS BY VOTES
So Free Float Analytics data has batting averages for TSR and earnings and carbon and a lot of stuff, but I wanted to really find where investors should absolutely care (but didn’t) and where they shouldn’t care (and also didn’t)
Here was the methodology - US market only
Find directors who have been on a board SINCE 2019 - a 5 year span
One of the biggest complaints about directors we talked to was how they could make a decision that would take 3, 4, 5 years to actually come to fruition - so let’s look at the class of 2019 as our starting point
Find directors who are still on the SAME board since then - so directors can hold them accountable for results at that company
10,629 US directors still on board of their companies since 2019 (about half of all US directors)
Look at 2024 voting results compared to the 5/3/2/1 year total returns of the stocks
we have results on about 3,000 of them from 2024 proxy season in our data right now
152 of those directors have negative total return over each of 5, 3, 2, and 1 year periods (5% who had elections in 2024)
ALL of them underperformed their sub industry returns
the average vote for reelection of NEGATIVE directors in 2024 was 93.72% FOR
984 of those directors have positive total return over each of 5, 3, 2, and 1 year periods (32% who had elections in 2024)
663 of them outperformed their sub industry returns
the average vote for reelection of POSITIVE directors in 2024 was 94.80% FOR
the OUTPERFORMANCE PREMIUM over a 5 year period is worth 1.08% more votes FOR by institutions in general
This INCLUDES insiders, CEOs, etc…
When you eliminate insiders, founders, CEOs, dual class, or family members - only 526 of the 3,000 - or about 1/6th - had elections where we have results in 2024
These are “professional” directors NOT at dual class or controlled companies where we have vote data and that have survived on their board since at least 2019 (if not longer)
32 have zero positive returns, all underperforming their subindustries
average vote for these 32 was 93.70% in 2024
204 have all positive returns, with 153 outperforming their subindustries
of the 153, the average vote for was 95.22%
the positive performer survivor premium as determined only by investors was 1.52%! THAT'S HOW MUCH DOING WELL IS WORTH!
TOP LIST
Company
FULLNAME
GENDER
AGE
inf_2019
2024Votes
THE PROGRESSIVE CORPORATION
Kahina Van Dyke
Female
52
0
99.8
FISERV, INC.
Harry DiSimone
Male
69
3.1
99.73
BARRETT BUSINESS SERVICES, INC.
Tom Cusick
Male
56
6.2
99.55
VERTEX PHARMACEUTICALS INCORPORATED
Sangeeta Bhatia
Female
55
3.5
99.55
FREEPORT-MCMORAN INC.
Frances Townsend
Female
62
11.1
99.19
THE TIMKEN COMPANY
James Palmer
Male
74
2.2
99.13
BOTTOM LIST
Company
FULLNAME
GENDER
AGE
inf_2019
2024Votes
CapAdd
PAYPAL HOLDINGS, INC.
Ann Sarnoff
Female
62
4.2
98.8
-1291.9676
Dominion Energy, Inc.
Joseph Rigby
Male
67
4.2
98.27
-822.6543
PFIZER INC.
Shantanu Narayen
Male
60
5.3
97.91
37422.5448
all Adobe
3M COMPANY
Dave Dillon
Male
72
6.3
95.66
-2469.7451
HAWAIIAN ELECTRIC INDUSTRIES, INC.
Peggy Fowler
Female
72
9.4
93.92
-343.0736
FUELCELL ENERGY, INC.
Matthew Hilzinger
Male
60
15.5
92.52
133.0464
prior years at FuelCell
TAKEAWAYS
Accountability isn’t real - the actual performance gap for a director who underperforms on total returns persistently over long periods of time still results in overwhelming votes in favor and costs them 1.5% of the vote
I have a new “Choosy Director” theory of investing
CHOOSINESS
The assumption is that a director who cares about performance will only choose companies at which either high performance is likely or it’s lucrative to themselves
I used the full “top performers” list for 2019 to find directors who were on OTHER boards in 2024, where they had a history of outperformance, and they had more than 10% influence (meaning they had committees, stakes, or other situations that made them powerful inside that boardroom).
The result was a short list of director-company combos where investors might reasonably expect outperformance given the power and persons on the boards
ISSUER_NAME
Country
League
GICS_SUB_IND
Sector
FULLNAME
AGE
GENDER
BOARD_MEMBER_SINCE
inf_today
director_grade
ANSYS, INC.
US
3
Application Software
Information Technology
Bob Calderoni
64
Male
2020-03-01
0.121
STARTER
CHARGEPOINT HOLDINGS, INC.
US
1
Electrical Components & Equipment
Industrials
Bruce Chizen
68
Male
2021-02-26
0.18
ALL STAR
GEN DIGITAL INC.
US
3
Systems Software
Information Technology
Eric Brandt
61
Male
2020-02-26
0.115
STARTER
CHART INDUSTRIES, INC.
US
2
Industrial Machinery & Supplies & Components
Industrials
Linda Harty
63
Female
2021-08-19
0.117
STARTER
Joby Aviation Inc
US
2
Passenger Airlines
Industrials
Reid Hoffman
57
Male
2021-08-01
0.103
STARTER
This is our watch list for next year for top form - we have no holdings in these companies, but I might have to go long Bruce Chizen
DAMION:
That’s the Proxy Countdown for the week of July 15, 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.
<OUTRO THEME>
