Proxy Advisor

Proxy Voting Advice for Individual Investors

 

Most Popular Voting Strategies

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Director Elections

Change requires action. The first action to be taken is to vote. In the following pages, we offer one way to look at voting, specifically, how to vote for directors.

Now, in a political election election - a town council race, a run for governor or a presidential election - we all have a pretty good idea who is running and what they stand for. We may not all come at it from the same perspective but if we vote, we have a pretty good reason for doing so.  But this is not the case when voting for a slate of directors.

Who are these guys (mostly)? How did they get on the ballot? What do they stand for?

These are all questions that are elusive at best and can only be measured by the results of the company they serve. This is compounded by the fact that director elections are largely rigged. Shareholders see this process as futile. This must now change.
Director Voting Checklist

Consider the following factors when casting your vote for or against a director or the entire slate of directors at a company. For further information about specific factors, go to the ProxyAnalyst Voting Strategies pages at http://theproxyanalyst.com.

Download the Director Election Checklist here.

Factor

Rationale

Vote Recommendation

Director Qualifications

 

 

Has a director missed more than 75% of the board meetings?

This is a fundamental question that goes to whether a director is actually doing his or her job. Look at the company proxy statement in the director section for attendance records of individual directors.

If attendance is sub-par, vote AGAINST the director in question.

Does a director sit on too many other boards?

As a general rule, a director who sits on too many boards (3 total) cannot possibly serve the interests of shareholders at your company. If your company is facing a significant challenge, a director should probably not be sitting on any other boards.

 

If the director serves on too many boards or appears to be overextended with other responsibilities, vote AGAINST the director in question.

Does the director have the necessary skills to do his or her job as a director?

While regulations now require directors to have financial experience if they serve on the board's audit committee, look for other qualifications that a director has or perhaps shouldn't have when serving on the board. One factor to consider is if there are too many CEOs from other companies serving on the board, particularly on the compensation committee.

If a director does not demonstrate that he or she has the requisite skills or does not appear to have the necessary expertise to serve as a director, vote AGAINST that director.

Does a director have conflicts or other disqualifications that raise questions about his or her ability to serve the interests of shareholders?

While directors are identified as being independent or insiders and the proxy statement must include possible conflicts that individual board members might have, look for other factors (social, board interlocks) that might suggest that he or she is not qualified to serve on the board.

If a director has a conflict of interest, vote AGAINST that director.

Is the director sufficiently independent of management of the company?

Look to the proxy statement to determine if a director is independent of management.

If a director is not independent and serves on any key committee, vote AGAINST that director.

Board Independence

 

 

Is the board as a whole sufficiently independent of management of the company (1/2 to 2/3 of the directors should be independent)?

After analyzing who on the board is independent, add up the numbers: is at least 2/3 of the board independent?

If less than 2/3 of the board is not independent, vote AGAINST all non-independent directors on the board.

 

Are key committees (Audit, Compensation and Nominating) of the board completely independent of management of the company?

This is a hard and fast rule. There should be no insiders on any key committee of the board. NEVER.

Vote AGAINST any non-independent (insider) director on key committees of the board.

Board and Company Performance

 

 

Have key committees of the board adequately performed their duties?

Look to see if the company has experienced any problems associated with the committee in question. Examples abound here. Has the company experienced financial troubles? Is executive compensation out of control? Is the average tenure on the board seemingly long?

Vote AGAINST directors on key committees that have failed to adequately performed their function as committees.

Has the company performed well over the long-term?

Look at long-term performance of the company and consider whether the company has underperformed relative to its peers and relevant benchmarks. Do not get caught in the trap of using short-term measures, either good or bad ones. In today's markets, one-year performance can be dramatic for a company but it could still be in the tank from a long-term perspective.

If the company has underperformed its relevant benchmarks, vote AGAINST the entire board of directors.

Overall, has the company conducted itself properly?

Consider if the company has been involved in scandals or crises over the previous year and also factor in how the company handled itself in the process.

If the company has not conducted itself properly, vote AGAINST all of the directors on the board.

Has the board been responsive to shareholders including implementing previously approved shareholder proposals?

Does the board have a demonstrated record of being responsive to shareholder concerns? Consider if the board has procedures in place for addressing shareholder concerns. Most important is whether the board has implemented shareholder proposals that have garnered majority support in previous years.

If a board has not been responsive to shareholders, vote AGAINST the entire board.

Has the company adequately addressed the views of other stakeholders?

Look to whether the company has addressed issues of concern to its stakeholders - customers, suppliers, communities in which it operates and so on. Recent examples include Toyota (recall), Comcast (customer service) and the myriad companies off-shoring jobs.

If the company has inadequately addressed the needs of it various stakeholders, vote AGAINST the entire board.

 

 

 

 

 

 

 

 

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Director Performance on Other Boards

A related concern to a director's ability to devote adequate resources and time to his position as director is the question of this director's performance on other boards on which he sits. Considering the amount of time that a shareholder can devote to proxy voting and researching this and other governance questions, a thorough analysis may not be done in a reasonable amount of time. However, a reasonably informed investor has some idea what is going on in the world around him or her.

A quick review of the directors' bios contained in the proxy statement will reveal where else they serve as directors. If a company name jumps out at you for all the wrong reasons, consider casting a vote against that director or at least looking further into the problem that has arisen at that other company before approving the director for another term on the board.

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Director's Ability to Perform

 

The Issue: Should service on other boards be a factor in measuring a director's service on the board of directors?

 

Recommendation: An individual's capacity to perform as a director is, in large part, measured by his or her performance across a range of roles as well as the time spent as a director on all boards on which he or she serves. As a rule, a director should not serve on more than 3 boards total. Moreover, give full consideration to his or her capacities in those other roles is an integral part of his or her ability as a director.

 

Two factors are at play here.

Multiple Board Service

First, how many boards of directors does the candidate serve on? It is difficult for me to fathom how a director of a public company can adequately perform his or her duties while serving on a number of other boards and hold a full time position, often as a CEO of another public company.

There is consensus amongst governance experts that a director with a full-time job shouldn't serve on more than 3 boards. Under no circumstance should a director serve on more than 5 boards. As a practical matter, it's difficult for me to fathom how a director could adequately handle board responsibilities at 3 companies while holding down a high-level position such as a CEO position at a public company. I will vote for a director when he or she serves on three boards but do so reluctantly. If a company is facing significant challenges, a director serving on any other boards may be a factor weighing against a vote for him.

Ability to Perform as a Director

Second, I have noted elsewhere that a director is largely measured by his or her resume or bio contained in the company proxy statement. This individual may look great on paper or, conversely, he or she may look suspect as a capable director because of some qualification that you or I may not like on first glance. I have mentioned rock stars and politicians as examples of people who I thought were unqualified as directors but were selected by management as window dressing. Under the circumstances, looking at that director's performance on other boards is a useful way to get a fuller picture of that director's capacity to perform. Pay particular attention to not only what is going on at other companies which the director serves but, where possible, try to get a handle on specific actions by that director that would give you a better picture of his or her worth.

A quick review of the directors' bios contained in the proxy statement will reveal where else they serve as directors. If a company name jumps out at you for all the wrong reasons, consider casting a vote against that director or at least looking further into the problem that has arisen at that other company before approving the director for another term on

These are all questions that you should ask yourself. Let common sense be your guide here.

 

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Key Committee Performance
While a key committee may be composed of independent directors who appear qualified to serve, at the end of the day, performance of the committee is what ultimately counts. Examples abound of situations where key committees have simply failed to do their duty in acting in the interests of shareholders. The Audit Committee at Enron is an astounding example of that committee's abject failure to oversee the financial management of that failed company. More recently, the gross payouts of executive bonuses at the largest financial services companies speaks to a failure of those compensations committees to have any sense of the reputational risks as well as financial ones at those companies.

Let common sense dictate your voting decisions here. Look at the facts surrounding activities at the company. If a key committee should have some accountability for adverse circumstances affecting the company, holding those directors accountable is your job as a shareholder.

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Consideration of Stakeholder Views

Depending on your perspective, this may be an important factor when considering whether to vote for or against a slate of directors. How has the company conducted itself in the communities in which it operates?

Examples abound of companies operating in the U.S. and abroad where companies have maximized profits while wrecking considerable harm: Royal Dutch Shell and Chevron in Nigeria, Union Carbide in Bhopal India, Coca Cola and Chiquita Brands in Colombia and Bank of America in the U.S. While it is rarer to characterize a company in a positive light when considering this filter on director voting, the recent actions taken by Google in calling out the Peoples Republic of China for censorship is an example of company behavior that could affect voting.

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