The Independent (NOT!) Chairman At Morgan Stanley

Among the many proposals up for consideration at this year’s annual meeting at Morgan Stanley is one that deserves your attention and your vote. Proposal #7 calls for the separation of the positions or chairman and CEO and also requires that the chairman be “independent.” For those of you that pay attention to these sorts of things, an independent chair proposal is not new. What makes this proposal unusual is the corporate chutzpah that suggests that this proposal is not in the interest of shareholders. Remember that “financial crisis” from a few weeks back? The boys at Morgan Stanley were some of the dealers at that crack house fiasco.

Morgan Stanley, along with a number of other financial services companies on Wall Street were engaged in a range of financial transactions that contributed to the global financial meltdown. The company, along with its compadres on the Street, traded on a range of securities that bet on the failure of the mortgage market. This gamble based on a failed bet that the unsustainable mortgage market would last (i.e. millions of bad mortgages would not somehow fail all at once) blew up, leaving ordinary people in financial disarray, economies around the world in crisis and the financial companies at risk of collapse. So far so good?

In 2008 and 2009 the company was in crisis. The Company’s then CEO John Mack (now the Chairman) was under pressure from the Fed and the Treasury to merge the company with JP Morgan Chase. Eventually, the Company was forced to take TARP funds, which it has since paid back. While all of this was going on, shareholders were taking quite the hit. MS share price went from a high of $67 and change in 2007 to less than half of that amount in 2010. Of course then CEO and now Chairman Mack saw a $41 million payday in 2007, which has since diminished to a paltry $1.5 million and change in 2009.

Yeah, pay for performance is working here.

Anyway, late in 2009 the Company announced the change in duties of Mr. Mack and the co-President James Gorman but from a shareholder perspective has anything changed on the board?

Well, no.

While a number of new faces have appeared on the MS board over the last couple of years, much remains the same. Several directors are seriously overboarded, holding 4 or more board positions (James Hance (5), Donald Nicolaisen (4), Charles Noski (4), Laura Tyson (4)), several directors have held their posts for excessive terms (Robert Kidder (17 yrs), Laura Tyson (13 yrs)) and of course, the chairmanship is held by an insider, Mr. Mack. Perhaps these problems could be ignored if the company hadn’t, well, screwed the pooch. Unfortunately for the rest of the world, that was not the case.

For MS shareholders interested in sorting out the pros and cons of this shareholder proposal, the Company proxy statement is of little help. Regrettably, the proponent talks in platitudes about the merits of independent chairmen. (Yawn). But somehow, corporate hubris seemed to get the best of executives at the Company who offer that “[t]he Board should not be constrained by an inflexible, formal requirement that the Chairman be an independent director who has not previously served as an executive officer.” The proxy statement goes on for several more interminable paragraphs suggesting that its independent board and committees all somehow validated its decision to let Mr. Mack continue on as CEO-Emeritus/Chairman.

Okay, so let’s recap: Stock price in the toilet, entrenched Chairman, entrenched board, executive pay rewarding short term performance, shareholders left holding the bag. This is a no brainer folks.

Vote for requiring that the chairman be I N D E P E N D E N T!

Black and Decker: Will Shareholders Take the Money and Run?

Today shareholders at Black & Decker will consider a merger with the company’s rival Stanley Works. At a 22% premium, such an offer will be hard to pass on. So it seems like the perfect opportunity for the board of directors to grant BDK CEO Nolan Archibald a tidy pay package of $89 million. Included in the payout is a “cost synergy bonus” of more than $45 million if the company meets certain cost reductions (can you say “LAYOFFS”?). Mr. Archibald, a 1% owner of the company’s stock will do quite nicely without the out-sized pay package.

In the Friday edition of the Wall St. Journal, it is reported that the New York Stock Exchange has raised questions about the independence of one of the directors on the company’s board – Anthony Burns. It seems that Mr. Burns as some significant personal business dealings with CEO Archibald that were somehow overlooked in the company filings with the SEC.

While it seems unlikely that the Big Board will do anything in response to this disclosure about this conflict, it speaks volumes to yet another example of boards failing to act in the best interests of company shareholders.

Performance-Based Proxy Voting

As I often do when speaking before groups of people about proxy voting and corporate governance, I asked this question: “What do you do with your proxies?” The answer, which you can probably predict from your own experience is, “I throw them away.”

The follow on question I pose evokes a bit more complex response but a common thread usually emerges. “Why do you throw them away?” Almost to a person the reason is that people simply don’t understand how to vote on the issues. Fearing that they might do something stupid, most people opt for the trashcan.

To solve this information problem, I propose to offer a series of proxy voting strategies that are simple in form, don’t require much time to figure out and get the job of voting your proxy done with relatively little pain.

Here is my first strategy.

Now that’s not too complicated is it?

I realize that some readers might find this approach too simplistic. But given that most people don’t take the time to vote, I hope this approach will provide a means for investors to become more engaged in the governance process.

Let the debate begin . . .

KB Homes: Where is the Compensation Committee?

As noted on Wednesday, ProxyAnalyst recommends a vote against the Compensation Committee members of the board of directors at KB Homes. The Los Angeles-based homebuilder has continued to grant substantial stock awards, retirement benefits and bonuses to its CEO Jeffrey Mezger while the company has underperformed over the last five years.

In 2009, Mr. Mezger was awarded a base salary of $1M. However, after awards of stock options, stock grants, incentive awards and a slew of other compensation benefits, his salary rose to more than $9M.  While his total pay has fluctuated over the last five years, it has in no way tracked the overall performance of the company for that period.

The following graph reflects the company’s stock price performance for the period. It is not a pretty sight with the company losing almost 70% of its share value during that period.

What I find most troubling is the manner in which the Compensation Committee failed to adequately address shareholder concerns while shoveling executive pay out the door. The compensation problem at KB Homes hasn’t gone unnoticed by at least some shareholders.

Last year, the company was targeted with a proposal calling for an advisory vote on future compensation packages doled out by the board. The proposal received a majority of the motes cast on the issue. However, the company rejected implementing the proposal saying:

Although a majority of votes cast were in favor, the proposal failed to achieve the affirmative vote of the majority of shares of our common stock present and represented at the 2009 annual stockholders meeting, the applicable standard under our by-laws. Based on this outcome and given the significant legislative and regulatory momentum underway at the time of the 2009 meeting and through to the present time to establish a mandatory advisory vote for all U.S. public companies, your Board continues to believe that it is in the best interests of all stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established.

So what the company said here is interesting for two reasons.

First, it points out a glaring flaw in the proxy voting system in which a company – in this case KB Homes – can count votes present or broker non-votes in calculating the total votes counted.

Let’s put this in the context of a presidential election. You and I vote for our candidate (he is running against the incumbent). Our guy receives a narrow majority (say 35 million) of the votes cast in the election out of a total of 60 million votes cast. However100 million voters were eligible to cast their votes. But 40 million of them stayed home. The incumbent says, “100 million voters are eligible to vote and if they didn’t, we will assume they voted for us, the incumbents.” So the incumbent counts an additional 40 million votes in his favor and walks away with the election.

Doesn’t sound fair but that is what KB Homes executives did in 2009 on the say-on-pay shareholder proposal.

Second, the company argues that because legislation is pending in Washington that might be a game changer on executive pay practices, it somehow shouldn’t have to pay attention to the wishes of a majority of its voting shareholders. What was that legislation anyway? While Congress has been debating financial reform for some time, nothing has materialized and the SEC has not taken any grand steps to obligate companies to obtain shareholder approval of pay awards. There is no real risk of legislative reform and I suspect that company executives knew that but obfuscation rather than reality seems to be the order of the day in that statement.

That brings us back to the situation at hand. The four directors, Stephen F. Bollenbach, Timothy W. Finchem, Michael G. McCaffery and Luis G. Nogales have not served the best interests of KB Homes shareholders in granting these pay packages to the company’s executives. Mr. Nogales is over-boarded (he serves on three other boards), Mr. Bollenbach is overpaid to the point that his independence is called into question and the Committee as a whole has not publicly demonstrated any sort of public leadership that could clarify its decision to pay executives outsized pay packages at shareholder expense.