But will it prompt big investors to take a tougher stand on director elections?
At a time when financial-investigative reporting is a dying art, TheStreet published an eye-popping article on Rhoda Pitcher, the longest-serving director of Lululemon Athletica. She appears to have few qualifications to serve on the board of major company, and information about her background provided by the company could not be verified. After describing its quest to “find” Ms. Pitcher, TheStreet concluded:
So, the longest-serving director on the board of a $10 billion public company has a personal history that cannot be traced, no identifiable photo, a business that cannot be found, and a degree from an unaccredited entity with a residential street address.
Lululemon and its outside public relations advisor didn’t offer a comment, which made them look inept and defensive.
It’s almost – almost – as shocking as the Brexit vote.
But while the company’s conduct is shocking, there’s been little notice paid to the action – or, more accurately, inaction – of the institutional investors that hold the vast majority of Lululemon’s shares. They include big institutions like Fidelity, Capital Group and BlackRock, firms that market themselves as guardians of their clients’ interests. But when it comes to choosing board directors at Lululemon, these firms have been anything but vigilant: Ms. Pitcher was re-elected last year with overwhelming support, according to an SEC filing.
This episode not only shines a harsh light on the auto-pilot approach to proxy voting by big money managers, it is a reminder of management’s influence over shareholder voting.
Ms. Pitcher enjoyed the recommendation of Lululemon’s management when it presented its proxy materials to shareholders. It urged shareholders to vote in favor of Ms. Pitcher’s re-election, endorsing her skills and experience.
It’s also likely the major proxy advisors – ISS and Glass Lewis – recommended her too, judging by the voting margin. We can’t know for sure because their recommendations aren’t public, but a negative opinion from one of the firms would have swayed a few votes, and the tally for Ms. Pitcher was about the same as the other directors.
The proxy-advisory firms are supposed to be independent from the companies they rate, but the relationships are rife with conflicts. Most companies hire the advisors to preview their proxy ballots, especially on sensitive topics like executive pay, and soon after the firms formulate voting recommendations for their investor clients. (Regulations for proxy advisors could be on the way. A House committee just passed a measure that would subject the firms to greater SEC oversight.)
Whenever a big corporate problem comes to light, inept directors usually can be found. It will be hard to get rid of them until institutional investors take their watchdog role more seriously.