Proxy Blog

Costco Wholesale Corporation

December 31, 2018

The 2018 annual proxy for this chain of members-only warehouse stores had the following proposals:

  1. Proforma votes on directors, appointment of auditors, and “say-on-pay” advisory vote
  2. Board proposal to approve incentive plan, declassify the board, and remove supermajority requirements from bylaws
  3. Shareholder proposal on prison labor

Magni voted as follows:

  1. Magni voted for and against proforma
    -For directors – The board has a majority of independent directors and some have CEO/CFO experience with other companies. The compensation of directors is disclosed with a meaningful portion in equity where the equity has restrictions to align director incentives with long-term value creation. The compensation levels are set using a benchmarking process.
    -For auditors – There appear to be no controversies with the financial statements of the company.
    -Against “Say-on-pay” – The proxy materials did not disclose any shareholder engagement efforts. The advisory vote language was pro-forma with no serious evidence that the vote matters.
  2. Magni voted for all board proposals
    -2019 Incentive Plan – An incentive plan is mostly good for shareholders as it aligns the interests of the leadership with creating value. The proxy explained the best practices included in the design of the plan.
    -Declassifying the board – Schemes to classify a board insulate it from shareholders and hence are not consistent with strong shareholder relationships. Costco has been thoughtful, though slow about addressing an issue that arose several years ago.
    -Supermajority – Requirements for supermajorities within governance guidelines tend to exist to protect the status of a powerful minority and hence are not consistent with strong shareholder relationships. Occasionally, such requirements are helpful in fending off hostile takeover attempts or can be a useful tactic in optimizing valuations when selling the company. Since the board seeks to remove the requirement, the board does not think the benefits associated with the potential occasional need are worth the costs in lower-quality governance. It is easy for Magni to support this proposal.
  3. Magni voted against shareholder proposal on prison labor. The issue is a complex one. While the shareholder provided powerful supporting materials, Costco has a thoughtful and nuanced approach to the issue. The company’s use of supplier audits and the record of audits producing beneficial changes in the supply chain are sufficient to vote against the proposal and let the company continue its current practices. This proposal is a good example of why good governance needs to be evaluated at the behavioral level.