It is no longer surprising when corporate boards issue outrageous performance bonuses and pay packages to executives. What is surprising is when shareholders actually vote against an "Advisory Proposal to Approve Executive Compensation." In a Reuters article on the shareholder rejection of the pay package for Citigroup (C) CEO Vikram Pandit, it was noted how rarely this occurs:
Last year, only 41 companies failed to get majority support for their pay out of an estimated 2700 companies in the Russell 3000 index that held votes.
But roughly 160 additional companies got just 70 percent or less support for the measures, according to governance research firms that track the votes. Those companies could face more shareholder resistance if they did not reform their pay packages.
At our 2011 Annual Meeting of Stockholders held on May 12, 2011, stockholders voted in favor of our executive compensation program, with over 93% approving our executive compensation program, philosophy and disclosure.
One wonders if the shareholders would have approved the plan if:
- they knew that Chairman and CEO Mary Wilderotter would receive a pay package of $6.7 million, or
- they knew that the top five officers would receive a total of nearly $14 million for their performance, or
- they knew that the executive performance in 2011 would result in a bonus payout of 90% of the target?
How can a Board of Directors reward executives that consistently stated that the dividend was sustainable and the payout ratio was where it was expected to be at the time of the company's acquisition of certain Verizon (VZ) properties, only to cut the dividend by 47% earlier this year? Does this seem like a management team that is doing its job effectively? Does it seem like this is an executive team worthy of any bonus?
I see no justification for the executive pay packages. In addition to managing in a manner that required a dividend cut and misleading shareholders about the necessity for such a cut, this management team also was on watch as the share price declined for the year by 47% from $9.73 to $5.15. Somehow, Frontier's Board of Directors found a justification.
This is also the same Board of Directors that issued a press release last October stating:
Frontier Communications Corporation paid its Third-Quarter dividend to shareholders on Friday, September 30, 2011 and announced today that its Board of Directors has reaffirmed its current intention to maintain the annual dividend of $0.75 per share of the Company's common stock.
"We remain committed to the return of capital to our shareholders at the dividend level announced in May 2009 and believe our ability to do so will be enhanced by delivering on the cost synergies of the Verizon property acquisition completed a little over a year ago," said Maggie Wilderotter, Chairman and Chief Executive Officer.
And, it is the same Board of Directors that does not even keep the announcement of the cut with the other press releases on its web site. Perhaps they are too embarrassed. One has to look for it under the applicable SEC filing:
Frontier Communications Corporation Declares First-Quarter Dividend
New Quarterly Dividend Rate of $0.10 per Share
STAMFORD, Conn., February 16, 2012 - Frontier Communications Corporation announced today that its Board of Directors has declared a regular quarterly cash dividend payment of $0.10 per share of common stock, payable on March 30, 2012 to holders of record of common stock at the close of business on March 9, 2012. This represents a reduction from the prior quarterly dividend of $0.1875 per share.
Fire the Board
A Board of Directors that failed to recognize a potential problem with the company's ability to cover the dividend has failed in its responsibility to shareholders. A Board of Directors that implements a bonus program that generates a 90% payout for poor performance has failed in its responsibility to shareholders. Frontier's board has been a failure and deserves to be fired.
Will it happen? No. I recognize that shareholders, even though owners of the company, don't really have the power to fire the board. The best we can do is vote against all the nominees, and that is more of a symbolic gesture. Shareholders don't even have the ability to vote against the executive compensation packages. From the proxy:
Our existing say on pay policy is consistent with Section 14A of the Securities Exchange Act of 1934 adopted in July 2010 as part of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which now requires the proposal. Because your vote is advisory, it will not be binding upon the board. However, the Compensation Committee will take into account the outcome of the vote when considering future
executive compensation arrangements.
The Board of Directors is including the "say on pay" vote because they are required to do so by Dodd-Frank. They will look at the vote, but won't necessarily follow it. Regardless, I have chosen to vote AGAINST each member of the Frontier Board of Directors and the Advisory Proposal on Executive Compensation.
The Dividend Cut
The Frontier dividend of $0.40 yields nearly 10% as the shares trade close to $4. Management and the board are telling shareholders the new dividend rate is more sustainable and adds flexibility. This story is familiar and shareholders have heard it before.
The real issue is not about whether or not the old dividend was sustainable or whether or not it should have been cut. Nor is it an issue of whether or not the reduced dividend is sustainable or proper. The issue is a board that failed in its responsibilities by not recognizing the need for a cut in a timely manner and issuing a statement that "reaffirmed its current intention to maintain the annual dividend of $0.75 per share" just four months before slashing that dividend by 47%. The issue is a board that rewarded a management team for poor performance and deception.
All too often investors fail to read and return their proxies, or simply rubber stamp the proposals by voting as the board recommends. If you, as an investor, feel the pay packages implemented by the board are reasonable, and that the board has acted in your best interest, by all means, vote as they recommend.
Citigroup investors decided their board wasn't doing its job and sent it a clear message. Frontier investors should also be sending a clear message to their board.
Additional disclosure: I actively trade Frontier and execute covered call strategies on a regular basis.