To what extent is crony compensation a vote winner – or loser, for that matter?
That’s the question arising from Marcato Capital Management’s latest presentation on Buffalo Wild Wings – the restaurant franchise where the activist is seeking four of the nine board seats up for grabs at this year’s annual meeting – and other proxy fights where dissidents have tried to demolish management’s credibility by focusing on compensation issues.
Buffalo Wild Wings
In slides published earlier this week, Marcato discussed the lack of open market share purchases by management and directors and apparent abuse of the company’s employee stock purchase plan (ESPP), with CEO Sally Smith apparently buying shares at a 15% discount to market value and selling even greater quantities within weeks.
The latter accusation is pretty serious, suggesting as it does straightforward enrichment at the expense of shareholders. Yet according to Marcato’s own presentation, the three longest-tenured executives replenished just 2% of the shares sold through the ESPP since 2003, so any benefit from the discount must be small in comparison to the wave of selling. Marcato also credits directors’ and senior executives’ “lack of long-term ownership” for “recent failures of governance and oversight,” although in fact the long tenure of some of its board and management team may be more of an issue than its short-sightedness.
Nonetheless, the facts make for some uncomfortable reading. Between 2011 and 2016, the proportion of shares owned by directors and executives fell from 2.2% to 1.2% as everyone cashed in on a rally that saw the stock treble to record levels. Yet when shares tanked at the tail end of 2015, management did not suddenly become a buyer (and is far from alone in that). According to the company’s website, Smith now owns 48,073 shares, down from 62,231 at the date of Buffalo Wild Wings’ 2016 proxy statement. In 2004, she alone owned 2.4% of the company.
Buffalo Wild Wings’ fallback is its compensation policy, which sets minimum stock ownership levels for executives including five times base salary for the CEO. Smith currently holds $7.4 million worth of shares, or 8.4 times her base salary – the stock would need to fall to $91 before she had to dip into her pocket. That policy, and all the other myriad devices contained therein, was approved by 99.4% of shareholders last year.
Moreover, Smith’s trading is likely conducted through a 10b5-1 plan, that uses strike prices or set dates to avoid the issue of management trading on non-public information. “Virtually all trading of the company’s common stock owned by management – who receive approximately half of their compensation in performance-based stock awards – is executed under preexisting plans that are commonly adopted for personal financial planning purposes,” a company spokesperson said in a statement.
In an activist fight, these have their limitations. Often, a proxy contest will juice returns, leading to more management sell-offs. In 2015, DuPont CEO Ellen Kullman was scrutinized for stock disposals after the arrival of activist investor Trian Partners. Nelson Peltz’s firm took out ads in local newspapers and wrote in its proxy statement of “crony compensation” and “premature equity sales.” Kullman was forced to defend her personal finances in a letter to employees, many of whom were also shareholders.
Smith, who has led the company since 1996 and through its 2003 IPO, is entitled to profit from her long stewardship of the company. Since going public, the stock is up nearly ten times the S&P 500 Index, although the distinction is barely extant over the last five years and ugly over the last twelve months. Those are more pertinent facts in a proxy fight than the specific circumstances of management’s compensation, important though they are.
Also pertinent are the details of management’s new franchising plan, announced a day before Marcato’s presentation. The company’s plan doesn’t go as far as Marcato wants it to, but rather than focus on the degree of change required, Marcato changed the conversation, denying management credit for being flexible. That was a smart move, and a prelude to an election campaign that may be almost as exhausting as the DuPont fight two years ago.
Article by Activist Insight