To Vote or Not to Vote
by Phil Weiss
Towaco, NJ (July 7, 1998) -- Once a year, we receive annual reports from the companies whose shares we own. Along with these annual reports come proxy statements and a ballot -- and many of us just toss 'em in the hopper. But since I believe that we're part owners of these companies, I've actually been voting my proxies for a couple of years now. I recommend it to you. Here's why...
Pretty much every proxy statement covers at least two issues -- a vote for some or all of the members of the Board of Directors (BOD) and a vote for who should serve as the company's outside auditor for the year ahead. Other issues commonly included in proxies are stock splits, increasing the number of shares of outstanding stock, matters pertaining to the company's stock option plans, and a variety of other issues like charitable contributions, political contributions, and environmental philosophy.
Let's talk about the Board of Directors first. After all, this group plays an important role in overseeing the people responsible for the day-to-day activities of our companies. Here are some qualities I believe to be important for directors:
1. They should be active, critical participants in strategic direction.
Now that all sounds good, but what does it mean and how do we know if our directors are meeting those aims?
First up, participation. One way to assess whether the directors are active participants is to see how many meetings they attend. The general threshold is that paid directors should attend at least 75% of board meetings. We're talking a couple meetings each year. If they don't have the time, then somebody else really should fill the role.
What about their independence from the enterprise? Well, the majority of directors should be free of close ties to both the CEO and the company. There should be a minority of company insiders on the board. And outside directors and their firms should not be doing consulting, legal, or other work for the company. In principle, if the outside directors are too cozy with the insiders and their business, they'll be less likely to challenge the CEO.
Lack of independence is a big criticism against the present board at Walt Disney Co. (NYSE: DIS). Many of Disney's outside directors are close friends with CEO Michael Eisner. But this may prove the exception to the rule. Disney's stock has risen well more than the S&P 500 over the past decade. Click here: Disney's 10-year chart versus the S&P 500.
On to point three above: stock ownership. The general standard for significant stock ownership is $100,000 of stock. When directors have their own shares on the line, they're more likely to be proactive, to spot problems in advance, and to swiftly head them off. Self-interest can be a great motivator. It's also preferable that outside directors have no pension benefits -- again, to ensure that they can act independently from insiders if needed.
If you don't think that stock ownership and independence are important, take a look at the ironic recent events at Sunbeam Corp. (NYSE: SOC), where chairman and chief executive "Chainsaw Al" Dunlap had insisted that his directors both be paid in company stock and that they buy additional shares.
At the June 2 board meeting, outside directors discussed allegations that Dunlap and cohorts had cooked the books to create a bogus turnaround last year. Because of their large stock holdings, the directors were doing so as very interested owners. They pressed Sunbeam executives for details, and decided that the company, which had already shocked investors with a first quarter loss, was going to fall well short of Dunlap's optimistic forecasts for the rest of the year. Four days later, Dunlap was canned. Even though all but one of the directors regarded Dunlap as a friend, they owned too much stock in the company to watch it quietly sink.
And now for the last point about board members -- that they ought not be overextended. You have to remember that, for most individuals, serving as a corporate director is a part-time post. Still, it's very important to find out if employed directors are sitting on more than 3 corporate boards. That's not good. Retiree board members should be on no more than 6.
When I see violations of these four Board of Director points -- 1) active participation, 2) independence, 3) meaningful stock ownership, and 4) focus -- I take the time to vote them down on my proxy.
There are a few other items worth mentioning.
First, generally I vote against retaining the outside auditors of a corporation if they've been there for more than a few years. After working at Deloitte & Touche for years, I found that companies that always defaulted to us typically paid too much each year and they risked having a too-cozy relationship with us. I like getting new blood in for a different perspective. It goes without saying that I vote against the auditors of any company that has had accounting problems (though often I've already sold out in those dreaded scenarios!).
Second, I normally vote against the issuance of more stock unless there's a good reason for it. "General corporate purposes" doesn't cut it for me. And I'm not a big fan of stock splits. I'd prefer to see the company buying back its shares and not issuing new ones. And I'd prefer to see the company educating its employees and shareholders that the number of shares one owns is meaningless. The total value of the holdings is what matters.
Third, I do normally vote in favor of stock option plans. I know that they cost me money through dilution, but I feel that giving employees a vested interest in the business leads to better performance (and undermines a strike -- GM, are you listening?). If the company has been performing well for many years, then I feel even more comfortable voting yes on this issue.
Finally, I evaluate all remaining issues on a case-by-case basis and find myself normally siding with management. It usually takes me about thirty minutes to do all of the above. I think it's time well spent. I do feel like a partner with the businesses that I own, and I think those feelings direct me to superior companies, superior long-term returns, and the potential for a lot of beach time with my grandkids some day.
How are our Cash-King companies doing with all of the above? Well, when it comes to Boards of Directors, pretty well. Each of the last two years, Business Week has rated corporate boards. Four of the top twenty-five boards in last year's issue were C-K holdings -- Microsoft at #4, Intel at #8, Coca-Cola at #15, and Pfizer at #19.
If you have any other questions or comments on this subject, we can continue the discussion on the Cash-King message boards linked below.
Phil Weiss, Fool
Day Month Year History C-K +0.22% 1.60% 15.87% 15.87% S&P: -0.23% 1.84% 15.32% 15.32% NASDAQ: -0.07% 0.71% 15.44% 15.44% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 107.94 37.91% 2/3/98 22 Pfizer 82.30 111.13 35.03% 5/1/98 37 Gap Inc. 51.09 64.56 26.37% 2/27/98 27 Coca-Cola 69.11 85.94 24.35% 2/6/98 56 T. Rowe Pr 33.67 38.50 14.33% 5/26/98 18 American E 104.07 114.00 9.55% 6/23/98 23 Cisco Syst 86.35 92.69 7.34% 2/13/98 22 Intel 84.67 75.06 -11.35% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 73.31 16.10% 3/12/98 20 Exxon 64.34 72.75 13.08% 3/12/98 15 Chevron 83.34 82.50 -1.01% 3/12/98 17 General Mo 72.41 69.69 -3.75% Cash-King Stocks Rec'd # Security In At Value Change 5/26/98 18 American E 1873.20 2052.00 $178.80 2/3/98 24 Microsoft 1878.45 2590.50 $712.05 2/3/98 22 Pfizer 1810.58 2444.75 $634.17 5/1/98 37 Gap Inc. 1890.33 2388.81 $498.48 2/27/98 27 Coca-Cola 1865.89 2320.31 $454.42 2/6/98 56 T. Rowe Pr 1885.70 2156.00 $270.30 6/23/98 23 Cisco Syst 1985.95 2131.81 $145.86 2/13/98 22 Intel 1862.83 1651.38 -$211.46 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1237.50 -$12.64 3/12/98 20 Eastman Ko 1262.95 1466.25 $203.30 3/12/98 20 Exxon 1286.70 1455.00 $168.30 3/12/98 17 General Mo 1230.89 1184.69 -$46.20 CASH $94.76 TOTAL $23173.76 *The year for the S&P and Nasdaq will be as of 02/03/98