Disney Shareholders Should Approach The Proxy Access Proposal With Caution

 

Walt Disney Co [DIS] shareholders are expected to vote on a proxy access proposal by the Connecticut Retirement Plans and Trust Funds (“Connecticut)) and the California State Teachers Retirement System (“CalSTRS”) that would allow owners of at least 3 percent of the stock (individually or as a group) to nominate up to 20 percent of the board of directors. The company’s 2014 Annual Meeting of Shareholders scheduled for Tuesday March 18, 2014.

I voted AGAINST this proposal relating to proxy access, for a number of reasons and strongly believe other shareholders should carefully approach the proposal with caution.

 

The Proposal & The Board’s Recommendation

The proposal put forth by the pension funds would allow owners of 3 percent of the company’s stock be empowered to nominate up to 20 percent of the board. They claim the reason is to “more easily promote independent director candidates to enhance accountability to shareholders”. They also cite that the board’s decision to re-combine Bob Iger’s CEO and Chairman role, as well as executive compensation as concerns and reasons for the provision.

 

The board recommends voting against the proposal :

“The Company’s current governance structure protects shareholder rights, ensures board accountability and meets current best practice standards. Proxy access is unnecessary at Disney because:

  • We have several mechanisms that protect shareholder rights. These include annual director elections, majority vote standard for uncontested director elections, a board comprised of 90% independent directors, a strong independent lead director, no poison pill and (if the proposal to amend our Certificate of Incorporation is adopted) shareholder rights to call special meetings.
  • We have a robust process for identifying and recommending director nominees to ensure that we have the right mix of skills, experiences and backgrounds on the Board.
  • Our shareholders already have the opportunity to bring director candidates to the attention of the board. The Governance and Nominating Committee considers all director candidates proposed by shareholders. In addition, our bylaws include a well-defined process for shareholders to nominate directors.
  • We regularly engage in dialogue with our shareholders and are committed to ensuring their views are represented in the boardroom. Indeed, our Lead Director’s responsibilities include direct communication with major shareholders. In the last fiscal year, our independent Directors met with many of our largest shareholders.

… “proxy access does not deliver advantages that potential disadvantages, which we detailed in our response to this proposal in last year’s proxy statement and include disruption, expense, distraction, politicization of director elections and bypassing current protections.”

 

I recommend each investor read the full details, which can be found on page 58-59 of the proxy materials of the SEC Filing or on the company’s website:

http://www.sec.gov/Archives/edgar/data/1001039/000120677414000306/waltdisney_def14a.htm
http://thewaltdisneycompany.com/sites/default/files/reports/proxy-2014.pdf

 

Why I Voted Against The “Proxy Access” Proposal

In addition to the board’s list of reasons, I believe the proposal is inconsistent with the claimed benefits:

  • Does not enhance accountability to shareholders, and has the opposite effect.
  • Allows for unfair influence & benefit to be given to a small group of shareholders over the greater interests all shareholders & individuals.
  • Bypasses current shareholder protections & procedures, which opens the door to destroying long term shareholder value.

 

Does The Proposal Really Provide Accountability?

The proposed resolution does not appear to provide more accountability and is likely to have the opposite effect. It would empower a specific small group of shareholders to nominate up to 20% of the board for shareholders to vote on, which is 2 members, and if elected would give more control to them. By having the right to nominate specific directors of their own choice (to appear on the proxy materials for voting), allows them to select directors who would best represent that groups interests. If selected, they would likely provide enhanced accountability to that group of shareholders and their common interests (pension fund liabilities), but will not necessarily provide more accountability to the rest of the shareholders. The best interests of pension funds are usually not the best interests for everyone else.

 

How Fair Is the Proposal?

The proposal does not sound fair to the rest of the shareholders since it allows owners of 3% to nominate up to 20% of the board. Where does that leave the rest of us? Note that 20% of the board would mean that the remaining shareholders would have essentially “given away” 2 out of the 10 elected directors to that group for free, if elected. Why should 3% have more nomination privileges than the aggregate of all other shareholders? If elected, their nominated directors would give them a direct channel for influencing all company decisions, which the remaining majority of shareholders do not have.

It would be more fair for them to do what activist investors like Carl Ican or David Einhorn have done when not happy with corporate performance, which is to purchase a proportional amount of shares to increase their ownership enough in order to earn a larger influence and make the changes they want. However, it is far less expensive and easier, if they can convince other shareholders into voting for their nominees and giving up fair rights to the special group with such a proposal and incorrect claims. But they are no more important than the rest of the shareholders. They are not more special than anyone else, and the proposal does not sound democratic.

Imagine if America introduced legislation that automatic gave more special nomination rights & privileges to a small group of individuals (with common interests) that hold 3% of the country’s wealth, allowing them to up to nominate 20% of the candidates for Congress? That is not democratic and it is a step backwards to favoring one group over everyone else.

 

Does The Proposal Enhance Shareholder Value?

The board seeks to maintain a useful mix of experience, skills, and knowledge, that the current directors bring to the company such as global branding & retailing, consumer facing technology & social media, traditional media/entertainment & networks, Asian markets, European markets, food services, non-profit and advisory groups, foreign relations, cultural & community experience, corporate governance & responsibility, financial management, online sales & operations, environmental & sustainability, and international labour, just to name a few.

The pension funds’ nominated directors may not be the most knowledgeable or qualified for directing the business. However, if elected, it would give that group much more influence than the remaining 97% of the shareholders because they would now have their selected representatives inside the company and on the board. By having directors on the board they can influence the decisions and the direction of the business. Business decisions that are made to meet/compromise with the interests of the pension group, may not be the best long term interests for the business and therefore has the potential to destroy long term shareholder value.

 

Pension Funds & Trusts

The business of a pension fund is very different than that of a global media business. Because of the responsibilities and obligations that pension funds have, there may be a conflict of interest with other shareholders. An example is Disney’s current dividend policy which has historically been much lower than most bluechip dividend paying companies. At a stock price of $80, it is roughly a dividend yield of 1%. When deciding upon the level of the dividend, management (at any company) looks at overall operations and future of the business. This also includes thinking about the very long term growth opportunities, and not just their current payout capabilities. Disney favors reinvesting retained earnings into internal growth or for making accretive acquisitions, both of which would help increase shareholder value in the long term, rather than focusing on higher income distributions yield levels.

Pensions on the other hand much different obligations, many of which have short term importance due to the nature of their business/operations, such as meeting the required yearly or monthly payouts to pensioners. They are likely obligated to sacrifice long term opportunities in order to meet these short term obligations, even if the impact to long term sustainability is significantly negative or even detrimental to the fund itself. We have seen examples of this on both sides of the boarder in recent years following the financial crisis, such as pension funds selling profitable assets in order to meet funding liabilities. Much of the time it has become a necessary evil, as pensioners and retirees lives depend on the payout income, and unfunded liabilities would leave them with few choices.

A hefty dividend increase on the other hand from their investment holdings would be much more desirable to a pension fund that has to pay income to retirees, than for them to sell some off shares/assets for money. Selling requires waiting & patience for the market price to reach satisfactory levels. Pension funds need money immediately and often cannot wait years if there are looming shortfalls.

Using more of the money for dividend payments, leave less for reinvesting into the company. It’s a classic short term vs long term conflict of interest.

 

Disney and Iger’s Exceptional Performance, Proposal Not Needed

When looking at the board’s accountability and the concerns of the dual CEO-Chairman role, Rob Iger and the company’s excellent performance prove that the proposal is not needed.

Iger’s performance since 2005 to 2013 has been nothing short of exceptional. Income from continuing operations has grown 12% while diluted EPS has grown 14%, on a compounded basis.

Iger and his vision has been crucial to Disney. He has overseen the turnaround of the company over the past few years. This includes the acquisition of Pixar in which he was a key factor, as well as Marvel, and more recently Lucas Films. 7 of the 20 highest grossing films of all time (ticket revenues only were produced under his tenure). The Interactive unit has also started to see a turnaround with the introduction of Infinity, and mobile/social focus. Iger has also successfully guided the company through very difficult economic times where consumer demand was weak for a number of years. So of course the company’s board wanted to elevate Iger to the chairman position and have it secured. As a business you want to make sure you have a visionary leader that can inspire the entire company to strive for new heights. He has done that, and as a private individual shareholder that is exactly what want.

As for the performance of the stock Disney’s total shareholder return under Iger was 202%, which easily trumps the 63% return of the S&P 500 performance peer group and the Media Industry group’s average total shareholder return of 152%

 

It seems that the company’s pay-for-performance executive compensation structure has been working. It is currently structured that over 90% of Iger’s compensation (and over 80% of the compensation of other named executive officers) depends on the Company’s financial results and the performance of Disney stock.

Have pensions & trust fund performance been nearly as good over the past decade? Public pension shortfall and unfunded liabilities have become a major issue in the past 10 years. According to an article in LA Times, Jack Ehnes, chief executive of the California State Teachers’ Retirement System, which has a $71-billion shortfall, says that without corrective action, “this plan will be insolvent in 30 years.” However, the teacher’s pension is not the only one facing problems. A large number of public pension funds & trusts on both sides of the boarder have the same looming problems! I also doubt their performance structure is anything even remotely similar if there is even a performance component at all.

At the moment, I honestly can’t think of a need for this proposal, other than to specifically address that group’s needs.

 

Proxy Advisors?

The proxy advisers/advisory firms Legal & General Investment Management, Institutional Shareholder Services (ISS), and Glass Lewis & Co. have recommended their clients (“shareholders”) to vote for the proposal. However, which shareholders are they serving? They are paid to advise and recommend actions that are in the best interests of their clients (who are the pension fund & trusts). They are certainly not my advisor, or the general advisor of the individual shareholders! Proxy advisory firms are not subject to formal securities regulatory oversight. However, the in December 2013, the SEC has noted concerns of potential conflicts of interest among other issues and has been considering potential regulation.

 

Pension Funds Have Been Trying For 10 Years

This year, only the two groups are named (Connecticut Retirement Plans and Trust Funds, the California State Teachers’ Retirement System (CalSTRS) as sponsors of the proposal. However, these two groups are also representing the interests of many other public pension funds & trusts, many of which were involved in similar proxy proposals in the past. Last year, a similar proposal was put forth by Connecticut Retirement Plans and Trust Funds which was rejected by the remaining shareholders.

But that was not the first time pension funds have been actively trying to gain special privileges and more influence. In 2004 CalSTRS it was a group of investors including fiduciaries and managers of the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, the California State Teachers’ Retirement System (CalSTRS), the Ohio Public Employees Retirement System (OPERS), North Carolina Retirement Systems, and the California Public Employees’ Retirement System (CalPERS). They had sent a letter in 2004 to the chairman at the time George Mitchell, about the performance of the board and company.

However, in 2004 the company was in a much different situation. In recent years, such action has not been necessary. Had the role been split last year, or compensation/bonuses reduced, there would have likely been a negative impact. This is considering the Pixar, Marvel, and Lucas Films deals that have been transformational.

If the pension funds & trusts are not happy with the investment’s performance, they could meet with company management, which they have been doing in the past (individual investors aren’t able to do this). Or they can sell their shares like any other investor would.

Their concerns and proposal has been raised for the past 10 years, regardless of the company’s operating or stock performance. It’s likely the issues identified by them are not the real issues at heart, but the steps needed to gain control to enhance their own interests (i.e. such as the dividend).

 

Am I wrong?

If my assertions are wrong about the proposal I would definitely want to know why, and am open to being further educated to change my vote. However, because it is such an important matter that I do not take lightly, further explanation would be necessary with specific examples explicitly illustrating the following issues of the proposal:

  • How exactly is the board (and the actions they are undertaking) not accountable to shareholders?
  • How has Iger’s role as both CEO and chairman hurt the company’s business in the past few years?
  • How has the executive’s pay-for-performance scheme not been effective?
  • What is the concern with these excellent performance numbers in terms of growth, financial health, profitability, or efficiency?
  • Why should a small group of shareholders get disproportionately more rights than all others?

So far I haven’t heard any real examples, only general claims, which sound very much like the false promises of politicians.

 

A Happy Consumer, Audience, Visitor, Parent, and Investor

As a consumer I have benefited with the many enjoyable entertainment experiences from the enhancements at the resorts & parks, to consumer products, and entertainment. I’ve never been more excited about their upcoming lineup of movies, and their new characters & stories. It also company whose products and services I can still entrust my kids to enjoy. There are very few of those left.

Pixar, Marvel, George Lucas, all believed Disney’s management was beneficial in ensuring their creativity would thrive and also be sustainable financially. No company is flawless and free from making some mistakes, but using the past decade as a gauge, the board and management has for the most part been making the right decisions as evidenced by their unique consumer products & services, movies, television, and resorts & parks offerings.

Disney has served me well as a consumer, audience member, resort visitor, parent, and investor!

How many companies have been able to do that? If things were different, I may vote differently. But based their current strategy, vision, and direction for the future, I voted AGAINST the proposal as the best thing to protect MY long term ownership interests in the company as an individual investor. I hope that other investors vote carefully and cautiously!

 

 

DISCLOSURE: I am long Disney, and do not intended to buy/sell shares in the next 10 trading days.

RELATED: /2012/08/10/disneys-growth-initiatives-pay-off/

Thanks & Happy Investing! — The Investment Blogger © 2014

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