Hunter Harrison’s compensation package may not sit well with some CSX Corp. shareholders or lower-level employees. But proxy advisory firm Institutional Shareholder Services’ lukewarm endorsement last week indicates why stockholders will likely approve it.
At next week’s annual meeting in Richmond, Va., CSX shareholders will be voting on an advisory proposal to pay Harrison $84 million for compensation he forfeited when he left his previous job to pursue the CEO position at CSX.
In its analysis of CSX’s proxy statement for the June 5 annual meeting, ISS gave the proposal “cautious support” because “the failure to approve the payment will likely result in an immediate and significant loss of shareholder value.”
Harrison says he will quit if he doesn’t get that $84 million.
CSX’s stock’s market value has increased by about $11 billion since Harrison began his pursuit of the job in January, which led to his hiring in March. Since much of that gain is attributed to Wall Street’s faith in Harrison’s abilities, his departure could wipe it out.
That should be enough for most shareholders to approve it, particularly the big money stockholders. However, many will not be happy about it, according to ISS.
“Some shareholders have expressed concerns about the way the board handled the negotiations with Mantle Ridge, the hiring of Harrison and the reimbursement proposal,” ISS said in its report.
Mantle Ridge is the hedge fund that backed Harrison and helped push CSX to hire him. Mantle Ridge founder Paul Hilal was appointed to CSX’s board of directors along with Harrison, and ISS had some interesting observations about Hilal’s impact on the company.
ISS initially recommended shareholders reject Hilal’s re-election to the board at the annual meeting.
“It is precisely Hilal’s ‘long-standing relationship’ with the CEO that causes concern,” ISS said.
The concerns centered on Hilal’s appointment to the board’s compensation and governance committees.
“Even though Hilal has promised to recuse himself from compensation decisions related to Harrison, he has made no such promises with respect to compensation for key members of Harrison’s management team (including any executives that Harrison may seek to recruit from other companies),” the report said.
“The board’s justification for appointing Hilal to the committees is not compelling.”
Hilal responded quickly. After reading ISS’s report Monday, he filed a statement with the Securities and Exchange Commission on Wednesday saying he resigned from those two committees “in recognition of those concerns.”
The filing said Hilal will continue to serve as vice chairman of the board.
Once Hilal resigned from the two committees, ISS late on Wednesday issued a revised report recommending shareholders vote for his reelection.
ISS recommends shareholders vote for all the other board members up for re-election but “with caution.” It said shareholders need to keep an eye on the new board.
“Shareholders should closely monitor the company’s compensation decisions given the increase in pay opportunities during FY2016. Harrison’s compensation for his service as CEO appears to be much higher than his predecessor’s, but his pay has not yet been fully disclosed,” it said.
Beyond the one-time $84 million payment, Harrison has a four-year contract but CSX has not disclosed the full value of his annual compensation.
While CSX likely will not report the value of Harrison’s pay until it files next year’s proxy, Mantle Ridge has said in SEC filings it is worth $17 million a year.
A Wall Street Journal story two weeks ago raised questions about Harrison’s health, which the company has dismissed. However, ISS said those questions also could weigh on shareholders’ minds when they vote.
“This lack of transparency is more concerning given that the board did not leave any opportunity for recoupment of the reimbursement. Once the payment is made, there is no provision that requires payback for any reason,” it said.
“While investors may believe in the 72-year-old CEO, given the substantial value at stake, the board should have further addressed these issues.”
Hilal’s response to the ISS report demonstrates the influence of the well-known proxy advisory firm. But ISS’s recommendations are not always followed.
Last month, it recommended shareholders vote out 12 of the 15 directors of Wells Fargo & Co. at the bank’s annual meeting in Ponte Vedra Beach.
But while some of those directors squeaked by with a little more than 50 percent of the vote, all were re-elected.
The vote on Harrison’s pay is only an advisory vote and could be irrelevant, because the board doesn’t have to follow the wishes of shareholders on the matter. It could award Harrison the $84 million anyway.
But as ISS indicates, despite many questions, it seems likely shareholders will vote in favor of the compensation.
Advanced Disposal bars the media
Advanced Disposal Services Inc. held its first annual meeting last week after its initial public offering in October, but we don’t know what happened.
The Ponte Vedra-based waste management services company barred the media and other non-shareholders from the event.
Public companies are well within their rights to limit attendance at annual meetings to shareholders only, but the media is allowed in at about 99 percent of those meetings.
There did not appear to be any controversial issues up for debate on the agenda at Wednesday’s meeting at the Ponte Vedra Inn & Club.
FIS sells majority of consulting business
Fidelity National Information Services Inc., or FIS, last week agreed to sell a majority stake in its Capco subsidiary for $477 million.
Capco is an international business, digital and technology consulting firm for the financial services industry, which FIS acquired in 2010.
Jacksonville-based FIS is selling 60 percent of the company to investment firm Clayton, Dubilier & Rice, while retaining a 40 percent equity interest in Capco.
“FIS’ ongoing minority ownership enables our clients to continue to benefit from the relationship, while we focus investment on our IP-led solutions,” FIS Chief Executive Gary Norcross said in a news release.
FIS said it expected Capco to contribute 11 cents to 12 cents a share to its earnings in the second half of 2017. The company has been projecting adjusted earnings of $4.15 to $4.30 a share for the full year.
“We don’t love the dilutive nature of the sale,” Robert W. Baird analyst David Koning said in a research note. However, Koning said he understands the strategic rationale for the deal.
“Capco is a professional services company that comes with lower margins than the core, and some lumpiness to the revenue stream,” he said.
FIS’ core business is providing technology for financial companies.
Foley’s company makes first deal
A year after raising money in an IPO to fund acquisitions, a blank check company run by Fidelity National Financial Inc. Chairman Bill Foley announced its first deal last week.
CF Corp. agreed to acquire Fidelity & Guaranty Life, an annuities and life insurance provider that has no current relationship to title insurance provider Fidelity National Financial (or to FIS).
But of course, in Foley’s always complex deal-making world, Fidelity National Financial (FNF) will have a relationship with Fidelity & Guaranty Life, or FGL, once the deal is completed.
CF is paying $1.835 billion in cash plus assuming $405 million of debt to buy FGL. To help fund the transaction, FNF is investing in FGL, but the company did not say how big FNF’s investment will be.
Foley founded CF last year with former Blackstone Group dealmaker Chinh Chu. It has been searching for acquisition targets since the IPO last year.
CF is headquartered in Las Vegas at the same address as Cannae Holdings Inc., the new company that will be created when FNF spins off its investment subsidiary, Fidelity National Financial Ventures, as a separate public company later this year.
Foley moved to Las Vegas when he was granted a National Hockey League expansion franchise there last year.
FGL will continue to be headquartered in Des Moines, Iowa, and run by its current management team. But Foley and Chu will serve as executive chairmen of FGL.
FNF also makes an acquisition
FNF itself didn’t want to be left out of all the deal-making last week.
The Jacksonville-based company announced the acquisition of Hudson & Marshall, a real estate and property auction provider.
FNF said the acquisition will enhance the services it provides to lender, servicer and real estate agent relationships.
Terms of the deal were not announced.
Scanlon joins Landstar board
In other Fidelity-related news, former FNF Chief Executive Officer George Scanlon was added to the board of directors of Landstar System Inc. last week.
The Jacksonville-based trucking company said Scanlon brings a strong financial and strategic background to the board, as well as experience in trucking and logistics.
His resume includes 18 years with Ryder System Inc.
Scanlon served as CEO of FNF from 2010 to 2013.