The raison d’etre of stock market players are various, but for anyone who has been holding stock, or intending to hold, for the longer-term (for simplicity let’s say in excess of one year), corporate governance has direct, profound implications on corporate value. Stock traders may be disregarding wholesale anything other than up/down ticks in price and margin requirements, but in fact, these so-called “providers of liquidity” — and societal stakeholders at large — are impacted by corporate governance. In the case of General Electric (GE), one of the most widely held and actively traded stocks, all stakeholders should be aware of the abuses of a select few that impact many. With external recourse nearly nonexistent, it is up to shareowners to realize the latent power of their proxy votes, vote accordingly, and effect change. Time is of the essence as GE’s annual meeting is rapidly approaching. Non-GE shareowners are encouraged to read and apply standards to their companies’ proxies. The corporate wrongs detailed below are widespread — it is proxy season so don’t delay.
Righting the wrongs
WRONG NO. I. GE’s entire board of directors is up for reelection. Not including CEO/Chairman Jeffrey Immelt, were you aware that 10 of 15 directors have tenures longer than a two-term president of the United States? However, GE ceaselessly claims these directors are “independent.” Seven of those directors have held their seats for over 11 years, the longest: 19 years. Meaning that they allowed GE to over-leverage, speculate and operate like a long-only hedge fund, manage earnings, become too big to fail, depend on the government for a lifeline, and siphon substantial monetary rewards for insiders.
In addition to seriously deficient independence, consider also that the CEO is the Chairman; most directors appear over-extended given their day jobs in executive capacities and other public and private board commitments besides GE; some exceed the de facto mandatory retirement age of 73; and all are compensated generously for their ostensibly important roles despite their visibly incommensurate ability to properly oversee management and look after shareholders. Directors in 2010 earned between $277,000 and $357,000 of compensation (cash, stock, and “other”).
RESOLUTION: Vote against directors that fit the above description — a far cry from independence and safeguarding — which is all but two: Messrs. Lane and Mulva. More importantly, recognize the unwavering effort of shareholder activist Evelyn Davis, who year-after-year submits a proposal in favor of cumulative voting. This proposal is crucial because it is unlikely that most shameless (i.e. for business relationship reasons), and/or perhaps ignorant (utterly, or due to laziness, apathy, unwilling to spend time, i.e. money?), institutional investors will vote against management, making it extremely difficult to garner enough votes against a director. Cumulative voting, which appears to be used at approximately 10% of S&P 500 companies, is a logical and fair counter against the outsized number of shares controlled by institutions (as in the case of GE). It allows for shareholders to place a multiple number of votes on one director instead of the traditional one vote per director.
For a simple example in which a shareholder owns 100 shares, instead of voting once ‘for’ or ‘against’ each director, one could vote 1,600 shares (100 shares x 16 directors up for reelection) on one director or any combination. It is not a perfect system, particularly since insiders know the votes as they come in (and could react by working the phones with institutional holders), but it is meaningful for individual shareowners and governance-minded funds that seek removal of an entrenched and/or unsatisfactory director. Therefore, by “latent power” (as it appears in this article’s title), I am referring to the ability of shareowners to read the proxy, review my article(s) and others’ advocacy (such as at Moxy Vote and ProxyDemocracy; see links at end of article), and vote accordingly, ‘against’ select directors and ‘for’ cumulative voting. Awareness and concerted action are the antidote to the exploitations of corporate directors and executives.
WRONG NO. II. Beginning this year, shareowners have been afforded the right to approve compensation practices of named executive officers ( known as “say-on-pay”). The good news is that shareowners have a “say,” and that GE’s management supports an annual (frequency) vote. That’s where the good news ends. On the flip side, the vote is only advisory; non-binding votes can be easily ignored by the board. And making matters worse, if shareowners do not vote ‘against’ the compensation system, they have effectively voted ‘for’ the absurdly high levels of pay lavished on executives. How satirical that is. I recently wrote about the items for shareholder resolution on GE’s proxy ballot, and thus, to avoid duplication, I will share an extract below.
RESOLUTION: Vote ‘against’ Management Proposal No. 2—Advisory Resolution on Executive Compensation. And vote ‘for’ Shareowner Proposal No. 2—Future Stock Options and Shareowner Proposal No. 3—Withdraw Stock Options Granted to Corporate Executive Officers.
Extract from “A serious look at GE ahead of its annual meeting”:
Two shareowner proposals involve stock options. One (the third shareowner proposal listed on the proxy) is urging a revocation of options granted to nine corporate executive officers in 2009 and 2010. Reason being is the timing and pricing of these were right near GE’s stock price trough in early 2009, compared to the historical timing of option grants in September (by which time GE’s stock had effectively doubled in price). There is also the matter of the number of options granted being between three and six-times historical levels. I support this proposal. Not only is the timing curious, but I don’t follow the Board’s (and Compensation Committee’s) logic that the executive officers, including CFO Keith Sherin, deserved rewarding for their stewardship of GE in difficult economic times. These are the same executives (and many of the same directors) that enabled GE to fall into the dire straits it found itself in late-2008 to early-2009. Note that the submitter of the proposal pointed out the Board’s likely rationale behind the most recently granted options as offsetting the worthless options set to expire (since their exercise prices of $27-$57/share were far above the market price then in the single digits).
The second proposal involving stock options (the second shareowner proposal listed on the proxy) regards premium pricing of options, instead of pricing at the grant date, and performance-based vesting, rather than time-based vesting. I support this proposal as well. Named executive officers (NEOs) all receive cash compensation in excess of $1.4M, and all but Chairman/CEO Jeff Immelt received $2.5M-plus bonuses in 2008 and 2009, not to mention the allowances they are given for transportation, financial and tax consulting, and home security and other services. On top of all that are their multi-million dollar pensions, ranging in value from $12M-$37M. Thus, when the Board/Compensation Committee speak of a need to motivate and retain NEOs, it seems they already have plenty from the aforementioned. Therefore, true motivation and performance bases necessitates premium pricing. Graham & Dodd, in their classic, Security Analysis, argued for pricing options “somewhat above the current market” — although this was prescribed for new management in a successful turnaround situation, I think the “turnaround” aspect applies here.
If shareowners support these two proposals, then they must vote “against” management proposal number 2, “Advisory Resolution on Executive Compensation.” While the new layout of the proxy statement/materials is much improved, making shareowners’ lives somewhat easier trying to read through the materials, and there are some good elements of GE’s compensation practices (no severance agreements, no tax gross-ups, and purportedly clawbacks of incentives), changes need to be made, specifically in the area of stock options. Too much is being given away too cheaply — consider that the annual cash compensation of NEOs is in the millions basically regardless of performance and they retain their multi-million dollar pensions. I accept the argument of aligning interests, but the risks and rewards diverge widely.
WRONG NO. III. GE has a demonstrated history of repurchasing stock at high prices and issuing equity at lower prices. Sadly, the destruction of value extends to the significant amount of stock option grants that meaningfully limit the accretive effect of billions of dollars spent on buybacks to reduce shares outstanding, which in turn is supposed to increase remaining shareholders’ portion of earnings or equity.
In my previous article, I noted that: “… GE’s annual report indicates it repurchased 111.3 million shares in 2010 at a cost of $1.814B, or $16.30/share. That sounds pretty successful compared to its recent price of $19.86, until you notice that shares outstanding only declined by 47.699 million shares. GE is sitting on almost $79B of cash, and has room based on earnings and free cash flow to boost its dividend further (something I think it will continue to do incrementally), but it will be a shame to see further repurchases making a modest dent in the share count. GE reported it has $9.9B remaining under its repurchase program.” And I shared the text of my proposal exposing the destructive nature of GE’s buybacks, “GE’s share repurchases: buy high, sell low.”
RESOLUTION: There is no means for remedy on this year’s proxy. However — and please see the link to “GE’s share repurchases: buy high, sell low” below — if shareowners are interested in submitting a joint letter to the board of directors outside of the annual meeting, please leave your name in a comment on this article either at my website or at Seeking Alpha, or email me at contact [at] steventowns.com. (Replace [at] with @ symbol.) If you are not a shareholder but are concerned with the excessive compensation and wasteful use of corporate funds, please also leave your name or send an email in support.
Benjamin Graham, the “Dean of Wall Street” (pioneer of value investing and coauthor of Security Analysis) knew all too well of the standard line of: “If you don’t like the management or what it’s doing, sell your stock.” He encountered that in the 1920s and it largely remained the attitude during his career until his death in 1976 and persists today.
The heedlessness and inertia of American stockholders as a class have long been notorious. This laxity has invited exploitation, and a certain amount of it has inevitably followed. The consequences have been more serious than the loss of money by investors. We think the flow of equity capital has at times in the past been sensibly retarded by the fact that many possible venturers have a feeling that they are helpless to control their capital after it has been committed into common stocks, and that they cannot reply upon receiving a square deal from those who will control it. In our view the establishment of sound attitude by stockholders who realize that they are owners of the business is the best way to remove this distrust and thereby to promote the flow of the public’s money into free enterprise. (Security Analysis, 1962)
John Hepburn, a shareholder activist based in New Zealand, submitted proposal number three above regarding the revocation of stock options. He will be speaking at GE’s annual meeting April 27th in Salt Lake City, Utah. I am sure Evelyn Davis, longtime proponent of cumulative voting, will be in attendance and speaking as well. I sincerely hope that they will find support amongst both proxy voters and those in attendance, in addition to the board and management taking them seriously. Note that April 25th is a critical date by which all proxy votes must be made. With just over two weeks until then, please be sure to read the proxy statement, review shareowners’ stances, and vote. Do not simply vote in-line with management, the default selection. Only by concerted awareness and action can shareowners unlock the latent power they control, and make directors and executives more accountable and their interests and remuneration more aligned with the average shareowner.
Disclosure: The author is a long-time shareholder of GE.
GE at Moxy Vote (Including my “advocacy,” there are eight “good causes” that shareowners can refer to in order to make a more informed proxy vote. See info boxes and navigation arrows next to “Who Has Opinions” at hyperlinked site.) Please consider joining Moxy Vote (free) and follow my recommendations.
GE at ProxyDemocracy (unfortunately no record of institutional fund voting available as of April 9th)
GE 2011 Proxy Statement (in PDF)