The Corporate Library Blog

Small Print

And now for this week's edition of Small Print, highlighting weird, funny and disturbing information discovered in SEC filings by our industrious data team.

I'm sure he had a prior engagement...

Thanks to Dovid Muyderman, Events Analyst, for this absentee shareholder 8-K announcement at Washington Trust Bancorp.

Although a stockholder proposal to eliminate all references to the Board of Directors being classified into three classes and to provide that the Board of Directors be elected annually was included in the Corporation’s proxy statement dated March 11, 2009, the proposing stockholder failed to appear in person or by designee at the Meeting, and therefore the proposal was not officially brought before the Meeting and no vote was taken thereon.

Had the stockholder or his representative been present at the Meeting and presented the stockholder proposal, the proposal would not have been approved because a majority of the shares present in person or represented by proxy at the Meeting and entitled to vote on the matter, voted against the stockholder proposal.

But if they didn’t have a vote, how did they know a majority voted against it?

He's got his work cut out for him

Dovid again with an April 20 8-K at CNX Gas Corporation.

On April 15, 2010, the board of directors of CNX Gas Corporation (the “Company”) formed a special committee (the “Special Committee”) consisting of John R. Pipski, the sole independent director of the Company, to evaluate the contemplated tender offer previously announced by CONSOL Energy Inc.

In connection with the formation of the Special Committee, the Company’s board of directors approved a payment of $150,000 to Mr. Pipski for his services on the Special Committee.

Leaving aside the fact that the company only has one independent director, isn’t a committee of one just a… person? When is a committee a committee?

But cutest Small Print of this week goes to Build-A-Bear Workshop with two entries.

Turn left at Hundred Acre Wood…

The assiduous Mark Magee, Events Analyst Team Manager finds this wonderful introduction to the proxy statement for Build-A-Bear Workshop.

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Build-A-Bear Workshop, Inc., a Delaware corporation (the “Company”), to be voted at the 2010 Annual Meeting of Stockholders of the Company and any adjournment or postponement of the meeting. The meeting will be held at our World Bearquarters.

You gotta love a company that has a World Bearquarters. You couldn’t get grisly with them, it’s too cuddly. Do they all get dressed up in bear suits? Is there honey for lunch? The board of directors: a polar, a black, a brown, and a teddy? Oh, why isn’t there an Edward on the board? And what a good job the CEO is not called Christopher Robin. But wait, they don’t have a CEO, they have a CEB. Take a look at the winner of the “Cutest Compensation Table Ever” award.

2010 Bonus Plan

On March 23, 2010, the Committee established the 2010 performance objectives for the range of bonuses that may be paid to the Company’s Named Executive Officers and the target bonus awards expressed as a percentage of eligible base salary. The 2010 Base Bonus Calculation for each Named Executive Officer will be determined by multiplying the Base Bonus Payout by the officer’s eligible base salary, as defined above, according to the following schedule:

As Mark says, can you imagine being reprimanded by the Chief Executive Bear or being put on the witness stand by the Chief Bearister? Bearister is a stroke of genius. I mean, you’d be hard put not to laugh even if you were in permanent hibernation. And where’s the Hibernation and Corporate Governance Committee, for example? Job description: Seasonal work….

Paul Hodgson - Senior Research Associate

U.S. Bancorp Annual Meeting Today

I hope you took your Blackberries with you because otherwise this one is going to be too late as U.S. Bancorp’s annual meeting is today and it is actually having a vote on whether you, as shareholders, actually approve of its executive compensation package. On an advisory basis, of course. (Buy the governance risk profile for U.S. Bancorp here)

You’ve probably got from my tone so far that we don’t… approve of its compensation package, that is.
So let’s try and figure out why.

Apart from having outstanding stock options coming out of the old wazoo – and at least this year’s was a little more moderate than previous grants – there’s quite a bit of foolishness going on.

First: there’s the $7 million retention award in 2009. I mean, where’s he going? He’s been with the bank in its various configurations since 1993 at least. He’s a company man. 

Second: we have a picture of a CEO declining compensation and the board and compensation committee falling over itself to give it back to him.

Base salary reduction? Only 5 percent and only allowed to last from January to October 2009.

No thanks to the cash bonus and the long-term incentive for 2009? Yes, that’s all very well, but we insist!

I mean, it’s right there in the CD&A.

In 2009, the Committee awarded Mr. Davis an annual incentive cash bonus of $1,255,500 under our EIP for the year ended December 31, 2008. In addition, he was granted a long-term incentive award in January 2009 for 2008 performance valued at $5,000,000. Mr. Davis declined to accept either the cash bonus or the long-term incentive award. However, in October 2009, the Committee recommended that Mr. Davis accept this award based on the fact that under his leadership we had passed the government-imposed “stress test,” repaid the funds invested by the government under the TARP and repurchased the related warrant, all while remaining profitable. Mr. Davis agreed to accept both the cash bonus and the long-term incentive award.

What is this?

“No, It’s fine, the banks going through a tough time with this economy. Honestly. I can get by on my base.”
“No, Sir, we insist, please, it’s only a little bonus. Not even as big as last year’s.”
“Yes, well, we didn’t hit our EPS targets this year.”
“That’s not the point, Sir.”
“Well, it is really.”

It’s like watching Monty Python’s Meaning of Life with the waiter trying to press just one more tiny wafer-thin mint onto Mr. Creosote. But without the buckets.

Retention?

He’s got more than 3.7 million underwater stock options. Worth nothing at the moment. Isn’t that motivation enough to stick around and work so the stock price is above the exercise price and you can actually make some profit on those?

Never mind just voting against the pay package. What about the members of the compensation committee too? Arthur Collins. Jerry Levin. Richard Reiten. Patrick Stokes. Boy have they been on the board a looooooooooong time. 14, 15, 12, and 18 years respectively. Time for a change of scene?

Paul Hodgson - Senior Research Associate

Scholastic Corporation (SCHL): Corporate Governance Concerns

The Corporate Library has some serious concerns regarding Scholastic Corporation's corporate governance. Their annual meeting is today. To purchase the company's governance rating and risk profile at a steep discount, visit our online store. The profile contains:

• Proprietary TCL governance risk ratings and analysis
• Complete CEO compensation review
• Board and individual director profiles and compensation
• Committee structures and independence
• Chronology of key governance events
• Hard-to-find related party transactions
• Current SOX 404 compliance status
• Critical takeover defenses information

Or you can request a free trial to Board Analyst to access our entire database of over 3,200 U.S. and Canadian public company profiles and ratings.

A major area of concern for Scholastic Corporation's corporate governance relates to board composition. Eight of the 10-member board have tenures of at least ten years. Five of them are long-tenured with at least 16 years of service, including Chairman and CEO Richard Robinson and former executive vice president Richard M. Spaulding. In addition, five directors are over 70 years of age. In fact, the average age of directors is approximately 66 years. While we recognize the benefit that comes with experience, it becomes increasingly challenging to act independently with such extensive service. This raises concerns about board entrenchment and succession planning.

Another concern relates to takeover defenses. The company has a dual class structure consisting of Common Stock and Class A Stock. Mr. Robinson and his family are beneficial owners of all Class A Stock, which is entitled to vote for eight of the ten directors. Shareholders of the Common Stock are entitled to only vote for the remaining two directors. This raises concerns about the lack of independent representation available to public shareholders and their interests being subordinated to those of the Robinson’s family.

There continues to be major concern related to executive compensation. The company’s Management Incentive Program entitles the company discretion to increase or decrease the total bonus paid to an executive, except for Mr. Robinson and Chief Financial Officer Maureen O’Connell. In addition, a small discretionary pool was approved by the Human Resources and Compensation Committee (HRCC) to be added to the available bonus pool based on business unit and/or individual performance. Given only that the company only met the free cash flow target and not the operating income target which resulted in the funding of the corporate bonus pool at a level of 21.5% of the targeted amount, the discretion bonus pool was most likely implemented to ensure that executives are sufficiently compensated. This is “pay-for-underperformance.” For more in-depth analysis on The Corporate Library's concerns with regards to the company's executive compensation, purchase the complete report  or request a free trial to our governance risk database.

Hoang Nguyen — Ratings Analyst

No More Exxon Annual Meetings For Bob Monks

The Corporate Library Co-Founder Bob Monks won't attend any more Exxon annual meetings, according to an essay posted on his blog Friday. He cites a disappointing lack of interaction between shareholders and management as a main reason.

Elizabeth Souder, a Dallas Morning News reporter writing for the Texas Energy and Environment Blog, writes about Bob's decision and her experience at Exxon's recent annual meeting here.

Target Board: Pershing Square Capital Plan Lacks Operating Strategy?

Hedge fund Pershing Square, which beneficially owns 3.3% of Target Corporation’s outstanding common stock, has nominated five candidates (William Ackman, Michael Ashner, James Donald, Ronald Gilson and Richard Vague) for election to the Target board at the annual meeting to be held on May 28th. Target’s board is classified, so only seats in Class III are open this year.

Pershing Square’s case for its nominees does not rest on having a specific plan to be implemented at Target, although Pershing Square had been advocating for a transaction allowing Target to realize value from its large real estate holdings. Instead, Pershing Square emphasizes the value brought to the board by its nominees, who have experience in grocery, credit cards, real estate and corporate governance, in light of the specific challenges facing Target.

Pershing Square’s approach appears to have hurt Pershing Square’s nominees with proxy advisor Glass Lewis, which recommended that its clients support the board’s slate due, in part, to the Pershing Square slate’s lack of an operating strategy. (Rival proxy advisor RiskMetrics, on the other hand, issued a recommendation supporting two of Pershing Square’s candidates.) Pershing Square also faults the Target board for low levels of stock ownership and for recent stock price performance lagging behind that of competitor Wal- Mart. Performance measurements cited by Target, however, show it outperforming both Wal-Mart and the S&P 500 over several time horizons.

In addition to the nuts and bolts of running the nation’s second-largest retailer, more abstract notions of shareholder democracy are also at play in this contest. Pershing Square refers to its slate as the “Nominees for Shareholder Choice.” In its proxy materials, Pershing Square states (in the voice of William Ackman, one of the nominees and the founder of Pershing Square), “I have always found it astonishing that in the most democratic nation in the world, elections for the boards of U.S. public companies are generally uncontested. . . . In the political realm, we see analogous elections only in the Third World and in dictatorships. We are not going to solve this problem today, but at Pershing Square’s expense we have created the opportunity for shareholders to choose between the company’s incumbent directors and a new independent slate that we have identified.”

Pershing Square’s request for a “universal ballot” echoes these themes. A universal ballot is a proxy card containing the names of all candidates for the board—those nominated by the incumbent board and those nominated by shareholders. Shareholders can execute one card to vote for whatever combination of candidates they wish, whether all company-backed, all dissident-backed or a combination of the two. (Without a universal ballot, shareholders wishing to vote for some board and some dissident nominees must execute two cards.) Pershing Square requested the universal ballot on the day Target released its definitive proxy statement, which may (depending on which side you believe) have been too late in the game to allow the ballot to be produced and distributed to shareholders, including those voting electronically via Broadridge’s electronic voting platform. In any event, shareholders will be voting in the traditional way, on separate proxy cards, at the upcoming meeting.

In connection with the contest, Target and Pershing Square are also wrangling over the correct size of Target’s board. Target asserted that the board had 12 members, following the resignation of the company’s former chairman and CEO, but Pershing Square claimed that the company’s charter required shareholder approval for any reduction in the size of the board below 13. Although Target disagrees with Pershing Square’s analysis, it has submitted a proposal for shareholder approval setting the board’s size at 12. If this proposal is approved, four board seats will be up for election at the annual meeting. If it is not approved, five seats will be open. (Pershing Square has nominated five candidates in the event five seats can be contested.)

Beth Young — Senior Research Associate, Shareholder Issues, M&A and Takeover Defenses

Gentiva: Whatcha doin’ tomorrow? Feel like a board meeting?

As reported in an article Monday in Agenda,Gentiva Health Services reported in an 8-K filing with the SEC that a special meeting of the Board of Directors was conducted by telephone conference call were held on Sunday, March 22, 2009 at 9:00 a.m. The special meeting had been called pursuant to notice properly given under the Company's By-Laws sent to all directors the evening prior. The purpose of the meeting was not stated in the noticed and materials related to the meeting were only distributed thirty minutes prior to the conference call. The business of the special meeting consisted of two matters: 1) consideration of a resolution to amend the Charter of the Board's Corporate Governance and Nominating Committee to provide that director nominees would be subject to the approval of the entire board instead of only the independent directors and 2) a proposal to reconstitute the membership of the Nominating Committee and to appoint Victor Ganzi and Raymond Troubh (both each have been on the board for 10 years), effective immediately, as members of the Nominating Committee, to serve with Gail Wilensky as Chairperson.  Mr. Ganzi and Mr. Troubh are two of the members of the Audit Committee, so adding them to serve as two of the three members of the Nominating Committee may increase their power on the board, and this raises the potential for a “board within a board” situation, where a few directors hold all of the power and the other directors have less influence on board decisions. Moreover, Mr. Troubh is 82 years old, raising concern about succession planning. These resolutions would appear to have the undesirable effect of increasing the influence of relatively long-tenured directors (whose independence may be compromised by their long service) over new director nominees.  

Both resolutions were narrowly approved, with six directors (Messrs. Victor Ganzi, Ronald Malone, Stuart Olsten, Tony Strange, Raymond Troubh and Rodney Windley) voting in favor and five directors (Messrs. Stuart Levine, Josh Weston and Drs. Gail Wilensky, Mary Mundinger and John Quelch) abstaining. At the meeting, the five abstaining directors commented unfavorably about the manner in which the meeting had been noticed, the amount of time they had to consider these matters and the process by which the proposed actions were presented to the Board. Afterward, from between March 22nd to March 26th, Dr. Quelch, Mr. Levine, Dr. Wilensky, Mr. Weston, and Dr. Mundinger notified that Chairman of the Board that they decided not to stand for re-election at the company’s 2009 annual meeting on May 14, 2009, charging that the board votes had weakened their power to pick new members. Mr. Weston stated that his decision was “triggered by [the Chairman’s] awful behavior before and during last Sunday’s sudden and very surprising board meeting.” He also criticized the company for a “total lack of candor, courtesy and transparency.” 

At the May 14th annual meeting, the company thus nominated only six directors, down from a board of 11 members before the recent events. Only three of the nominated directors meet listing exchange independence standards; if these directors are elected, the board will thus not have a majority independent board.  The company has a plurality election standard and as result, in an uncontested election a candidate can be elected by a single vote. The company says it will remedy this defect as soon as possible after the annual meeting by adding one independent director, and that it intends to increase its board size to nine. 

This will be an interesting one to watch going forward.

Kimberly Gladman, CFA, Ph.D. — Director of Research and Ratings