Selected voting activity – US based semi-conductor designer – Governance issues

The issue

The company is a US-domiciled designer, developer, and manufacturer of semiconductors and other infrastructure products. The company is benefiting from exposure to investment in artificial intelligence, cloud computing, and networking solutions. The company is therefore generating strong cashflow of an increasingly recurring nature given recent acquisitions.

We voted against management in respect of a (non-binding) advisory shareholder vote to ratify its executive officer’s compensation package in 2023. We were joined by 67.8% of those casting their votes.

In April 2024, the company again put forward an advisory (non-binding) shareholder vote to ratify its executive officers’ compensation package. The proposed compensation package included:

• A front-end loaded equity grant valued by our proxy advice service, ISS, at $313m, linked to share price appreciation over the subsequent 5 years; 
• An excessively complex design for regular long-term incentives. This provided for half of the long-term incentives to time vest, incentivising the executive team simply to stay in post rather than deliver to a performance milestone. The remainder targeted median relative total shareholder returns, which in our view may not be sufficiently linked to the company’s financial and business plan to appropriately incentivise the management team.

We look carefully at resolutions relating to executive pay with the aim of aligning the shareholders’ long-term interests, as far as possible, with executive pay. In particular, we expect the remuneration of the management of investee companies to be closely linked to performance. We look for clearly structured, transparent remuneration packages, which are appropriate in size and mainly linked to quantifiable targets.

Activity

We state in our voting policy that, ‘we expect remuneration committees to consider sizeable shareholder votes against remuneration in previous years and respond appropriately’. Notwithstanding the company’s engagement with shareholders following the substantial vote against the 2023 ratification, and some improvements included as a result, we objected to the following elements of the proposed package:

the excessive size of the front-end loaded equity grant, which we did not consider appropriate because it  locks in high pay opportunities for a long period of time. Additionally, the equity grant only considers one view of performance, share price performance (which can be subject to market performance and short-term actions, such as share buy-backs, rather than long-term value), and ignores other relevant performance metrics, such as operational performance under management’s control.

Further, we favour both simple incentives and incentives linked to management performance. Thus, the complexity, time vesting, and arguably limited links to management performance of the long-term incentives was a concern.

Outcome

We voted against management in accordance with ISS advice and the principles set out in our voting policy. We were not alone: 38.1% of shareholders votes cast rejected management’s recommendation, the highest proportion of votes against any item on the ballot.

We hope this substantial dissenting vote will encourage management to continue in their engagement with shareholders to ensure clear and appropriately sized incentives linking pay to performance.