GE's 2012 Proxy: Pleasing Performance?

| About: General Electric (GE)
This article is now exclusive for PRO subscribers.

General Electric's (GE) annual meeting is April 25th in Detroit. That leaves roughly two weeks for shareholders to vote their proxies, and votes really should be in by midnight of the 23rd to ensure proper counting. And as you'll see from my analysis below, it's important to vote your shares, no matter how few, since there is a clear disconnect between the executive suite and board of directors compared to many a common stock owner.

GE 5yr stock chart

I take proxy voting seriously, especially as a longtime GE shareholder. You'd be surprised by what you find in companies' proxy statements (as well as their 8-Ks or statements for disclosure of material information; see for a daily highlight reel). I have prepared this article in the same order in which GE's proxy vote is arranged - with a copy of GE's proxy and your electronic voting screen (link available from your brokerage or via a printed VIF) so you can review how I voted as follows.

Atop GE's proxy statement is its Board's recommendations for voting matters. Naturally, the Board is in favor of each director nominee, ratification of the corporate auditor, KPMG, its executive compensation practices, as well as two other matters concerning compensation. Unsurprisingly, the Board is against all four shareowner proposals. Let's briefly review each director nominee and proposal and you'll then be better informed how to vote your shares.

Get ready, because you should never trust the Board's recommendations, which is what happens if you leave any voting items blank or aren't careful and choose to vote with management's recommendations. Also, I'm assuming that nearly anyone reading this votes electronically. If you have already voted, know that you can re-vote and your latest vote is what counts. You only need the link and control number that you were originally provided.


GE claims 14 of its 16 board members are "independent " - only Chairman/CEO Jeff Immelt and Roger Penske (of Penske Automotive) are not. Similar to my positions in 2010 and 2011, I find the board a far cry from being independent due to lengthy tenure: 11 of 16 directors have been on the board for 10 or more years. Some new faces are badly needed, especially ones with more industrial experience. I also find that board members appear to be over-extended with other executive-level and/or board commitments. My votes and notes follow.

W. Geoffrey Beattie - FOR - director since '09, "for," given his presumed background in finance, welcomed given GE's issues in this area. However, he does seem over-extended as the head of a private holding company that owns Thomson Reuters, and with his directorships also at the Royal Bank of Canada, Maple Leaf Foods, the Globe and Mail, and the University Health Network in Toronto.

James Cash - AGAINST - director since '97, which includes the end of the Jack Welch era, Welch's controversial use of company resources, the rise and fall of GE Capital, and Mr. Cash is on the Compensation Committee, which allowed very dubiously timed, priced, and sized equity grants following the 2008 crash, and it also paid bonuses to named executive officers [NEOs] excluding J. Immelt. Mr. Cash is emeritus professor at Harvard Business School and former head of its MBA program; seeing how GE became dominated by GE Capital and how the company has wasted tens of billions of dollars on pricey share repurchases, issued equity subsequently at much cheaper prices, and has failed many of its shareowners by slashing its dividend and of late increasing it by token penny hikes, with all due respect it seems it's time for Prof. Cash to go.

Anne Fudge - AGAINST - director since '99; see comments for Mr. Cash above excluding Compensation Committee, of which she is not a member.

Susan Hockfield - FOR - director since '06, while I'm not convinced the president of MIT has enough time to devote to, and understand, a company the size of GE, she is a newer director, doesn't report any other directorships, and she adds science and engineering expertise, as well as gender diversity, thus my "for" vote.

Jeffrey Immelt - ABSTAIN - director since '00, no problem with him remaining a director but he should be replaced as Chairman; the CEO-Chairman roles need to be split. "Independent Board Chairman" is the third of four proposals submitted by shareowners.

Andrea Jung - AGAINST - director since '98, see comments for Mr. Cash noting that she is also on the Compensation Committee. In addition, she is the head of Avon, where she is also a director, and she is a director at Apple. How can she possibly have time to look after shareowners' interests at GE? And how does her background in beauty products relate to GE's businesses?

A.G. Lafley - AGAINST - director since '02, tenure on the board hitting ten-year mark; feel that his background as the former Chairman and CEO of Procter & Gamble (NYSE:PG) has little industrial relevance to GE. Mr. Lafley serves on the Governance Committee, however, the Board has displayed an uncanny ability to find its own members to be independent, which as you are seeing is far from the truth; the board also votes universally against every shareowner proposal including ones that make great sense for shareowners (such as Cumulative Voting and Independent Board Chairman, both proposals again in this year's proxy).

Robert Lane - FOR - director since '05; although he is a member of the deep pocketed compensation committee, he is a new director and he brings industrial and leadership experience as the former Chairman & CEO of Deere (NYSE:DE). The presence of so many current and former Chairmen/CEOs on GE's Board may explain why the Board has consistently opposed the Independent Board Chairman proposal.

Ralph Larsen - AGAINST - director since '02, tenure on the board hitting ten-year mark; was previously Chairman & CEO of Johnson & Johnson (NYSE:JNJ), and currently is head of the aforementioned deep pocketed compensation committee. Time for change.

Rochelle Lazarus - AGAINST - director since '00, tenure on the board exceeds ten-year mark; in addition, she is head of the Nominating and Corporate Governance Committee, thus based on my above notes, it is time for change.

James Mulva - FOR - director since '08, is Chairman & CEO of ConocoPhillips (NYSE:COP). A welcomed industrial-type addition, however, the matter of splitting the combined Chairman/CEO roles could be inhibited by his current position as such.

Sam Nunn - AGAINST - director since '97, hitting the 15-year mark (see above comments). Also, he is a member of the Compensation Committee and he could also be over-extended as Co-Chairman and CEO of the Nuclear Threat Initiative, a university professor, and a director also at Coca-Cola (NYSE:KO).

Roger Penske - AGAINST - director since '94, and although GE doesn't claim he is independent, it is about time for him to go. He has the second-longest tenure of all directors, during which time shareholders have suffered from GE Capital's rise and fall, accounting restatements, tens of billions of dollars of pricey share repurchases, a slashed dividend, and poor executive compensation judgment.

Robert Swieringa - AGAINST - director since '02, tenure on the board hitting ten-year mark; is a professor at, and former dean of, Cornell University's Business School. GE's board has more than enough academics (Mr. Cash above is emeritus professor at Harvard Business School, and Ms. Hockfield is President of MIT). Refer to earlier comments for Mr. Cash.

James Tisch - FOR - director since '10, as President and CEO of Loews (NYSE:L), brings welcomed background in diversified business management including Loews' subsidiaries, Diamond Offshore Drilling (NYSE:DO) and CNA Financial (NYSE:CNA).

Douglas Warner - AGAINST - director since '92, tenure on the board hitting the twenty-year mark; is former chairman of JPMorgan Chase (NYSE:JPM). Is on both the Compensation and the Governance Committees. His suspect independence, the damage to shareowners during his tenure (see Penske and Cash above), his committee seats, and all this despite his supposed financial expertise, makes it a no-brainer that it's time for change.


While GE's proxies in the past two years have gotten better and better with summarizing compensation practices early in the report, that does little to assuage the excessive compensation of both named executive officers and the board directors. In previous articles I detailed how the Compensation Committee essentially allowed named and other top executives to rip off shareowners by granting options opportunistically at an irregular schedule post-2008 crash and at very outsized allotments and single-digit stock prices. While Jeff Immelt continues to not receive a salary increase (since 2005), one can argue that $3.3M in cash salary and a $4M bonus is more than sufficient. Further, when looking beyond a hurdle of stock performance versus the S&P Financial and Industrial sectors, the real point of reference should be the stock price in reference to its highwater mark.

That GE fell to almost $5/share and has since returned to around $20/share is great, but it's still half its prior stock price. There seems to be little or no justification for paying executives bonuses for getting back to the highwater mark, especially not how GE paid its executives (excluding Immelt) bonuses following the crash and also made the controversial aforementioned options grants. Another matter is that yes, it is good for GE to show realized compensation versus total compensation, which adjusts for changes in pension value, but it's also the case that accumulated pensions are absurd when factoring in multi-million dollar pay packages year in and year out that are supplemented by seven and possible eventual eight-figure equity grants.

Let's also keep in mind the perquisites received by named executives, including life insurance, transportation, financial counseling, home security, GE products, and an annual physical - nothing to scoff at, ranging between $136K and $447K for four of GE's five named executive officers [NEOs]. These are all items the average employee pays for out of pocket. I can understand employee pricing maybe, for GE products, but how about having executives plough some of their millions of earnings into taking care of themselves. Ditto for directors, whose compensation on average (based on the median) easily exceeded $300K each. The company can then hire some more people or donate to charity or education what was previously spent on executives, hardly needy folks.

Finally, regardless of what discount rate used to value pension benefits, GE's NEOs won't have to worry about paying bills when they retire either, each has an accumulated pension worth at least $18M. In terms of directly-owned stock (not counting performance/restricted units), Immelt owns 2.9M shares, and the other NEOs between 2.1M and 3.5M, in other words, between $40M and $60M each.

Management Proposals

1. Regarding ratifying GE's choice of auditor, KPMG, it always bewilders me that GE has to fork over $100M+ annually. In 2011, KPMG billed GE for $87.1M of audit fees, $15.1M of audit-related fees (hmm…) and $11M of tax fees. Grand total: $113.2M. My analysis last year showed GE's audit fees where way more expensive than other Fortune 500 companies. I voted AGAINST KPMG.

2. "Say-on-pay" - I voted AGAINST GE's executive compensation. Bonus, equity, and pension compensation are excessive. Even using GE's measure of "realized" compensation, which backs out changes to pension value, NEO's earned between $6.9M and $7.8M. Using a value of $7M and assuming the average worker earns $50K, which is higher than the national median no matter who does the counting, the pay ratio is 140:1.

3. GE wants your permission to increase the number of its shares issued by 425 million for compensation purposes. That represents around 4% of shares outstanding. It's important to consider voting AGAINST this proposal since what is certain to happen is that GE will also be trumpeting out a renewed share repurchase plan when its current one expires as it needs to continue to repurchase shares in order to try and keep a lid on their ever rising count. While some reporters and investors may cheer buybacks, the fact is the "market" knows better with GE. My own research shows GE has an impeccable record of value destruction by means of share repurchases.

4. This proposal involves what seems like some smoke and mirrors about performance goals for senior executives. I didn't feel good about reading it the first time nor did I the second time. The "per-person maximum amounts" were not reassuring and nor was the prose that followed. I voted AGAINST this proposal.

Shareowner proposals

1. The first proposal involves allowing cumulative voting. The untiring shareowner activist, Evelyn Davis, is the proponent as she has been for years. It's the same cat and mouse rubbish year after year. The fact is that the Board is against cumulative voting because one or more directors would probably not be reelected each year, plain and simple. As Ms. Davis explains:

… each stockholder shall be entitled to as many votes as shall equal the number of share he or she owns multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit.

Let's help Evelyn help the majority of outside passive minority shareowners by voting FOR this crucial proposal.

2. The second proposal requests GE withdraw from nuclear energy. It mentions the March 11, 2011, disaster in Japan and notes Germany, Italy, and Switzerland have announced they will abandon nuclear power. It's not mentioned, but as of April 2012 all but one or two of Japan's fifty or so nuclear reactors are offline and while not ideal, Japan is managing without. That is to say that in light of the various risks posed to communities and the environment, as the proponents mention, it seems GE ought to at least be considering dialing back its nuclear power-related business. Of course the Board disagrees and among other things cites the impact if it should to its medical equipment business.

That's the problem with shareowner proposals. It's hard enough to write one, let alone have it beat the company's hyperactive lawyers' and outside counsel's multiple attempts at shooting it down, and then you get the Board's statement of opposition, which amounts to its worldly wisdom of why the proposal would upset the company's masterful overseeing of everything. I'm FOR this proposal. It's better to begin dealing with this now before it becomes a serious liability.

3. The third proposal requests an independent board chairman. Are you kidding me? More than half the board has tenure of 10 or more years, and over the past decade CEO Jeff Immelt has chaired the board while CEO. Unless you bought at $6/share and could give a dead rat (the Mark Twain-era equivalent to what some say nowadays referring to a rat's rear end; I saw it when recently re-reading Huckleberry Finn), the status quo is a nonstarter in my opinion. Enough said. I voted FOR this proposal.

4. The last proposal involves allowing shareowners to take action by written consent including matters the Board is not in favor of. The proponent mentions that the same proposal won support at 13 companies in 2010 and that hundreds of companies enable shareholder action by written consent. Except, notably, of course for GE - no cumulative voting, no independent chairman/CEO, and unless you own or can bring together owners of 20% of GE's equity, no chance of calling a special meeting.

GE's largest share owner is the huge asset management company, BlackRock (NYSE:BLK), at just over 5%! The only way a special meeting is getting called is either if a consortium of institutional investors suddenly realize how powerful they could be, or if many of us that own shares either directly and/or via proxy through mutual or retirement funds are able to convey to our fiduciaries that they need to be better stewards of our capital. Never say never! I'm obviously FOR this proposal.

And there you have it. I thank you very much for any reader going through all the voting matters and taking into consideration my thoughts. I look forward to any reader comments. Let's hope that FOR votes are nowhere as high as they were last year for directors and that they are much higher than last year for the shareowner proposals.

Disclosure: I am long GE.