Apple: My “Say on Director Pay” Proposal and How I’m Voting

The Shareholder Activist - Apple: My “Say on Director Pay” Proposal & How I’m VotingApple (AAPL) is one of the stocks in my portfolio. Their annual meeting was held on February 23, 2012 . This was one meeting I attended in person, both to vote and to move my motion to provide shareowners with a “say on directors pay.”

When I last looked, had recommendations from twelve “good causes.” had four participating funds voting.

Looking at Apple’s proxy, I’m surprised to see our company doesn’t include an index with hyperlinks to the Summary Compensation Table and to items to be voted. That’s not very user friendly, especially for a company know of high tech genius and pleasing its customers.

The Table shows that Timothy D. Cook, our CEO, was the highest paid named executive officer (NEO) at a little under $378 million. According to the United States Proxy Exchange (USPX) guidelines, the median CEO compensation for S&P 500 corporations was $10.8 million in 2010.

Since Cook’s pay is above that amount, I am voting against the pay plan. While I’m willing to make some allowances for a company that appears to have locked onto a great formula to create shareowner value, $378 million is just too much. Additionally, none of the $376 million he received in stock grants was performance-based. I am concerned with the growing gap between the 1% and the rest of us. We need to stop CEO pay from ratcheting continually upward via the Lake Wobegone effect.

My policy is that if I am voting against the pay package I also vote against all members of the compensation committee, unless there are overriding considerations. Therefore, I will withhold votes against Andrea Jung (Chair), Millard S. Drexler and Al Gore.

I’m voting against the shareowner proposal seeking a “Conflict of Interest Report.” While the proposal sounds good on the surface, a closer look reveals its intent is to keep Apple from supporting measures to address global warming.

Of course, I’m voting in favor of my own proposal, Shareholder Say on Director Pay. More on that below.

I’m also voting in favor of Carey Lovelace’s Report on Political Contributions and Expenditures. I’d like to see this disclosure as a requirement for all companies but we aren’t likely to get a law until we have adopted proposals like this one at many companies.

Last, I’m voting in favor of CalPERS’ proposal, Adopt a Majority Voting Standard for Director Elections. More than 80% of the companies in the S&P 500 have adopted a form of majority voting for uncontested director elections. It is simply good governance. In fact, a similar proposal was supported by 73% of shareowners at last year’s annual meeting. Yet, management has refused to implement it.

On all other proxy items I voted with management.

Shareholder Say on Director Pay

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The term “chemistry,” or your ability to work collegially with the other members, is often used in board searches, and it can make or break the hiring decision. Even today, prickly devil’s advocates are not often sought to fill these spots.

Eleanor Bloxham’s fantastic article in Fortune (Now hiring: Corporate boards. Applicants beware., 12/13/2011) speaks volumes as to why I submitted a “Say on Directors iPay” proposal at Apple. We have a say on the CEO’s pay and the pay of other named executive officers (NEOs) but not on board pay. Yet, at least on paper, the directors are the ones we elect and who negotiate CEO pay on our behalf. If we had more input on directors, we wouldn’t need to worry about the CEO and other NEOs. Shareowners need to focus more on board members. They are our direct representatives. Studies show that investors consider “independence” the most critical foundation of boards of directors. That independence can be compromised by too much pay, as well as by too long a service.

At Apple, in 2010 we were paying at least two directors more than $1M a year; that’s more than $2500 an hour. Two of our directors were full time CEOs. How much time do you think they were putting in on board service? Although director pay was substantially reduced for 2011, there is nothing to prevent them from soaring again. With a “say on directors pay” that would be less likely.

When you read Apple’s rebuttal to my proposal in the proxy, you will see they spend more time playing down the cost of their “Equipment Program” than they do addressing actual money paid out to directors.

According to Apple, each director gets each new product and can buy products at a discount… and here’s what they seem especially proud of.

Directors are not provided tax gross-ups payments for the taxable income they incur in connection with the equipment program.

Can you imagine? Directors actually have to pay taxes on the difference between the cost of any equipment they get at a discount and what they charge when they sell it. They are bragging that Apple provides no tax gross-ups on their equipment program! That doesn’t seem like something tooting your horn over.

The Apple board doesn’t require a majority vote to get elected either. That means if no one is running against the directors picked by the nominating committee (almost always the case), all it takes is one positive vote. The other 899,999,999 shares could be withheld or could be votes against and the directors would still win. That’s a better deal than Vladimir Putin gets in Russia.

Apple is a great company. With a little more involvement from shareowners, it can be even better. See also, Shareholder Seeks an Annual Vote on Director Pay at Apple, ISS, 12/16/2011; The Director Compensation Project: Apple, theRacetotheBottom, 6/8/2011; and The Implications of Say on Director Pay (Part 6), theRacetotheBottom, 12/19/2011.

If you are an Apple shareowner or represent Apple shareowners, I’d like you to consider the whole concept of “say on director pay.” For example, here an excerpt from Ceres Governance Principles (page 12):

1.A. Loyalty
The primary duty of the board of directors is to oversee management on behalf of, and in the interest of, shareowners. Shareowners elect directors to guide and monitor the company’s management, to assure that the company is being managed in such a way as to safeguard the interests and assets of its owners, rather than in the managers’ own interest. This is the duty of loyalty.

In applying this principle we would, therefore, recommend a vote ‘FOR’ resolutions that align the interests of board members more closely with those of shareholders. Ensuring that board members truly represent shareholders requires certain changes to the director nomination and election process such as declassifying boards, allowing shareholders to nominate candidates using the corporation’s proxy card, nominating more than one director for each position or electing directors by a majority of votes cast in uncontested elections—all measures that can bring some competition to the market for corporate directors. Independent boards and key committees are less beholden to management and therefore more likely to represent shareholder interests, as are boards chaired by an independent director. Director pay practices should align directors’ economic interests with those of shareholders through stock retention guidelines and through some shareholder say on director pay. (my emphasis)

Ceres is a nonprofit organization that leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global climate change and water scarcity. List of Board Members. The Ceres Company Network has approximately 80 members representing more than 20 industries, including technology, footwear and apparel, food and beverage, oil and gas, electric utilities, and financial services. More than one-third of the company members are in the Fortune 500. For a list of members click here. Apple is not on the list of members but you can download Ceres Sustainability Podcasts from iTunes, so Apple at least knows of their existence.

While the above cited material from the report, Ceres Guidance: Proxy Voting for Sustainability, may not reflect the views of all Ceres sponsors, I note that one of the purposes of the Guidance is to get asset owners and managers to re-visit their guidelines and policies. See especially Proxy Guideline Examples, Appendix C.

The National Association of Corporate Directors (NACD) recently held the second annual meeting of its national Nominating and Governance Committee Chair Advisory Council to identify ways that board nominating and governance committees can help build investor confidence in publicly traded companies.

The group discussed how boards can avoid pitfalls in proxy reporting and why shareholder proposals in 2012 are expected to focus on individual directors. The Advisory Council then discussed board practices for dealing with those issues, including more thoughtful disclosure about pay and board composition, aligning board composition with corporate strategy and communicating the rationale for director elections to shareholders more proactively.

If you represent an institutional investor, I realize “say on director pay” may not be covered by your existing proxy voting guidelines. However, I hope you will give this proposal careful consideration. We don’t elect CEOs and they aren’t directly accountable to shareowners, yet we have a say on their pay. Doesn’t it make much more sense for shareowners to have a say on the pay of directors, our representatives? The NACD recognizes shareowners have turned the spotlight on directors.

The NACD Advisory Council raised the need for “more thoughtful disclosure about pay and board composition.” If we had “say on director pay,” would you expect more communications from and with your elected representatives on the Apple board or less? If shareowners answer that question before voting we will have a revolution more powerful than that envisioned by the 1984, Apple’s Macintosh Commercial. Isn’t it time shareowners woke up? Don’t just occupy space, occupy a real role in our company as a shareowner.

Vote Yes on item #6 – Shareholder Say on Director Pay.

My say on director pay follows (embedded links added):

6 – Shareholder Say on Director Pay

Resolved: Shareholders request that our Board of Directors adopt a policy that provides shareholders the opportunity, at each annual meeting, to vote on an advisory proposal, prepared by the Board of Directors, to ratify the pay given members of our Board of Directors as disclosed in the proxy statement. The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any pay given to any director.

The proxy advisory firms Institutional Shareholder Services and Glass Lewis each recommended that shareholders of at least one major company vote in favor of a 2011 shareholder proposal on this topic. A shareholder proposal with similarities to this proposal won 55%-support at a major company in 2010.

This proposal is similar to our management’s proposal on this same ballot enabling us to cast a vote in regard to the pay of our executives. This shareholder proposal simply extends the shareholder voting opportunity to apply to our directors. Some of our directors are paid more than $1 million for work that may take less than 400 hours per year – or $2500-plus per hour.

The merit of this Shareholder Say on Director Pay proposal should be considered in the context of the need for improvements in our company’s 2011 reported corporate governance status:

  • Only one yes-vote from our 900 million shares was all it took to reelect each of our current directors. On the other hand, we cannot elect a director by written consent to fill a vacancy created by removal except by a 100%-vote from our 900 million shares. Two of our directors owned less than 200 shares each, including a member of our Audit committee.
  • Two of our directors were active CEOs, Andrea Jung and Millard Drexler. CEOs don’t always make the best directors. While CEOs are on many boards, they don’t always make the best directors, according to a recent survey by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance.
  • Active CEOs were described by some respondents as “too busy with their own companies to be effective directors.”
  • Stephen Miles, a vice chairman at Heidrick & Struggles said, “Because active CEOs are so busy, they might be unavailable during a crisis or have to cancel meeting attendance at the last minute. They also have less time to review materials. For some, the demands of their full-time job make it hard for them to consistently be as engaged as they need to be.”
  • Plus these two CEO directors made up two-thirds of our Executive Pay Committee. And Timothy Cook’s pay was $59 million.
  • The Corporate Library, an independent investment research firm, said our directors Albert A. Gore Jr. and Millard Drexler were paid more than $1 million each.

The above concerns shows there is need for improvement.  Please encourage our board to respond positively to this proposal: Shareholder Say on Director Pay – Yes on 6.

To contact James McRitchie directly, please email

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Posted in Corporate Governance, Featured, Shareholder Policies & Investor Regulations, Shareholder Proposals | 1 Comment

One Response to Apple: My “Say on Director Pay” Proposal and How I’m Voting

  1. Christopher Bayer, Ph.D. says:

    According to the United States Proxy Exchange, S&P 500 corporations compensated their CEOs at a median rate of $10.8 million in 2010. Tim Cook’s, Apple’s CEO, summary compensation package was valued at $378 in 2011. A good deal of his compensation was not performance based. No matter how you slice the apple, Mr. Cook has a very good gig.

    So do his board of directors. If you factor analyze their hourly wage they are sitting pretty: anywhere from $1000 per hour to $2500 plus. It’s all about perspective and value. In 2010, as per the Social Security Administration, the national average wage index as approximately $42,000.

    It’s well known that American CEOs are compensated, on average, at nearly 475 times the rate of the average company worker. Euro-Zone counterparts are compensated at 15-22 times the rate of their average workers. We are creating a business aristocracy in this country. Europe is well stocked with monarchs and royals. American CEOs are the new ruling class! And they are a brand unto themselves, and as such image must be maintained regardless of performance metrics.

    Given the data, how could CEOs not champion the Lake Wobegon Effect? Fictionalized by Garrison Keillor on his radio show A Prairie Home Companion, the effect refers to the all too human tendency to overestimate and overvalue one’s skills and capacities. At its root is a cognitive and emotional bias, well researched in social psychology that enables people to overestimate their myriad of positive qualities, while suppressing their negatives: the illusion of superiority. If we pay CEOs outrageously then they must be worth it. How could they not be? Perspective and value is relative, relative to brand, marketing and the business cycle.

    McRitchie poignantly outlines his intentions, his governance philosophy, and his interest in Apple. He values and appreciates the company. Well informed and proactive shareholders make companies better. We are all partners: it’s our company. This is an essential, righteous governance construct what warrants being honored, not pacified, ignored, or disrespected. The Shareholder Activist’s credo is: “Don’t just dispute, contribute.” McRitchie’s contributions are enormous.