Excise tax gross-ups proving controversial.
Citing Apple chief executive Steve Jobs’ relatively low meeting attendance as a cause for concern, ISS and Glass Lewis have both weighed in on the topic of reelecting Jobs to Disney’s board of directors, with Glass Lewis outright recommending against his reelection. Nevertheless, the entertainment giant’s shareholders voted Jobs back onto the board at the company’s annual meeting in Utah on March 23 this year.
Jobs has been on Disney’s board of directors since 2007 and is the firm’s largest shareholder, owning more than 20 percent of its stock. He also has a controlling interest in Pixar, the animation company he sold to Disney. Jobs has been battling several health issues, including cancer, for some years, and circumstances related to his illness led Glass Lewis to recommend against his reappointment.
‘Nominee Jobs attended less than 75 percent of the meetings held by the board in fiscal year 2010. We view this as a failure by this director to fulfill his duty to shareholders,’ the Glass Lewis report reads. ‘While the company notes in its proxy statement that Jobs failed to attend the meetings due to medical reasons, we note that this is the third time in four years where Jobs has been unable to meet this attendance threshold.’
For its part, ISS noted Jobs’ lower-than-average attendance as a reason to keep an eye on his board seat in the future, but did not go so far as to recommend that he should not sit on the board of directors.
‘Despite having the largest portion of Disney shares and owning a controlling stake in Pixar, his health limits him,’ says Zenia Mucha, executive vice president of corporate communications at Disney, in a brief statement regarding Jobs’ reappointment. ‘The Walt Disney Company considers itself fortunate to have Steve Jobs as a member of its board of directors.’ Glass Lewis also recommended against six other Disney directors – Susan Arnold, John Chen, Fred Langhammer, Aylwin Lewis, John Pepper and Orin Smith – but they all managed to keep their seats.
Stock answers
The shareholder advisory group was also critical of the entertainment company’s stock incentive plan, issuing a negative recommendation against it. Furthermore, it gave Disney a ‘D’ for its pay-for-performance model, noting in its report that Disney paid ‘more compensation to its top officers… than the median compensation for 33 similarly sized companies with a median enterprise value of $127 billion.’
Conversely, Disney CEO Robert Iger touted the company’s successes at the shareholder meeting. He also previewed some of its upcoming attractions, including new animated films, the earlier-than-anticipated opening of its Aulani Hawaiian resort in August, and its theme park expansions. ‘For the year, net income increased 20 percent to $3.96 billion on a 5 percent rise in revenue to $38 billion, and the total return delivered by Disney to shareholders was up nearly 24 percent – substantially more than the 14 percent delivered during the same period by the S&P 500,’ Iger reported.
While also noting Jobs’ attendance as a concern, ISS’ report gives a more forgiving review of the annual meeting, offering softer feedback on the board’s structure, citing the benefits of Iger being an independent director and noting that all the directors bar Jobs attended more than 75 percent of meetings. Shareholder rights and audits were both of ‘low concern’ according to ISS, too.
Executive compensation was of ‘medium concern’ according to the ISS report, due to a lack of disclosure of holding periods for restricted shares to executives. Both ISS and Glass Lewis recommended annual votes for executive compensation, and the company’s shareholders agreed.
Those shareholders were less eager to pull the trigger on reappointing the board of directors, according to Ted Allen, ISS’ governance counsel and director of publications. ‘There were fairly high – at least higher than normal – withhold votes against some of the directors,’ he says. ‘I think there are investors out there who have voting policies that take a harder line.’ There were few directors with support levels shy of 90 percent, but normally most directors get as much as 93 percent, he adds.
Initially, ISS also recommended against giving several members of the board of directors, including Iger, ‘excise tax gross-ups’ – benefits allowing them to have the company pay taxes associated with their severance packages. The initiative was scrubbed as a result of pressure from shareholders, however.
Columbia Law School professor and corporate governance expert Robert Jackson says it is not uncommon for companies to move away from excise tax gross-ups, as they are often considered too much icing on the cake. ‘Generally, excise tax gross-ups cost shareholders more than they benefit them,’ he says. ‘Even though one size doesn’t fit all, Disney’s move seems designed to make sure the CEO has reasons to seek out the best deals for shareholders and won’t be paid an excessive amount.’
Companies often give substantial severance packages to CEOs to ensure they have adequate motivation to work toward selling a company, if that sale is in the best interests of shareholders. Paying the taxes on those severance packages is a relatively new benefit, and some shareholders believe it is going too far. ‘Increasingly, ISS and other shareholders have pressed large public companies for the elimination of gross-ups – and firms are listening,’ says Jackson.
Based on the formula used to determine the gross-ups, which includes salary and benefits for the past five years, none of the Disney directors would have received
