The Corporate Library Blog

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:

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• 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

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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