Legal-software seller Dye & Durham is having trouble winning at the corporate-governance game. But it seems to be doing a great job of working the refs.
Glass Lewis & Co., one of two major proxy-advisory services, has republished its recommendations in advance of Dye & Durham’s annual meeting on Dec. 19. Glass Lewis initially had harsh words for the company’s pay practices and said shareholders should withhold their votes for two members of the company’s compensation committee, Mario Di Pietro and David MacDonald.
The revised proxy paper, however, softens the language surrounding Dye & Durham’s compensation practices and reverses the negative recommendation; now, Glass Lewis says Dye & Durham shareholders should vote “yes” for the full board.
Glass Lewis had it right the first time. Dye & Durham is a governance laggard.
The company is the last remaining member of the S&P/TSX Composite with an all-male board. Dye & Durham plans to fix that this month with the nomination of its first woman, former Nutrien Inc. executive Leslie O’Donoghue. (Former Saskatchewan premier Brad Wall will exit the seven-member board to make room.)
Brian Derksen, the company’s chair, told The Globe and Mail in February that the company’s goal was to add at least two women to the company’s board in 2022. It failed. Dye & Durham now says it’s setting a policy to have women make up 30 per cent of its board by the 2023 annual meeting.
The company also has a compensation and stock-option problem: Too much and too many.
Dye & Durham gave chief executive Matthew Proud an option grant in October, 2021, that at the time, it has now disclosed, it valued at $98.8-million. Dye & Durham said it needed to incentivize Mr. Proud after his attempt to take the company private failed. A number of shareholders disagreed: In a vote related to Mr. Proud’s option grant last year, 34 per cent of them opposed it.
The company also attempted to give 100,000 stock options to each of its six directors, other than Mr. Proud. The options were supposed to replace stock-appreciation rights, an option-like compensation instrument, which the company gave the directors the previous year. But when a majority of shareholders voted against the new option award, the company didn’t proceed.
The directors kept the stock-appreciation rights they were supposed to forfeit if the option plan were to pass, which vexed Glass Lewis. The adviser originally said that allowing the directors to keep the SARs “negates the intended purpose of requesting shareholder approval to begin with.” Glass Lewis has now that struck those lines, along with the comment that shareholders “should be extremely concerned” with the past approval of the stock-appreciation rights. Now, Glass Lewis hedges, shareholders “may reasonably be concerned.”
“Upon further consideration, we believe shareholder opposition to director nominees on this basis is not warranted,” Glass Lewis adds to the new, revised report. “We will continue to monitor these issues going forward.”
Institutional Shareholder Services, Glass Lewis’s larger rival, is unswayed. It has recommendations of “withhold” for compensation-committee members Mr. Di Pietro and Mr. MacDonald, citing “apparent misalignment of pay and performance and continued problematic pay practices.”
ISS says Mr. Proud’s 2021 option grant “appears excessive” compared with the company’s peers. Since Dye & Durham also granted Mr. Proud an option award valued at $15-million in fiscal 2021, its “practice of awarding outsized equity awards is also problematic.”
ISS is also dismissive of what the company calls a performance-based vesting schedule for Mr. Proud’s 2021 options, where Dye & Durham stock must hit certain levels for the options to become usable. The 9,187,894 options it has given him since November, 2020, will be worth almost $800-million if the stock hits $120, the company says in a table of examples in the proxy circular. (The share are trading at about $13 right now, but they were at $40 when it gave Mr. Proud the most recent batch of options.)
ISS and other governance advocates have become more critical of stock plans with price-based vesting because rapid increases in periods of volatility can cause shares to vest and give executives millions – before the stock quickly falls.
ISS declined to comment for this piece, so I can’t say whether it had to resist any pressure to change its report.
Dye & Durham essentially declined to comment. In response to a wide range of questions, including some about what the company said to Glass Lewis and ISS, spokesperson Morgan McLellan said in an e-mail that “all disclosure related to the election of our directors and our compensation practices can be found in our management information circular.” That was, as Regis Philbin used to say, their final answer.
The disclosure in the proxy does say that after the Dec. 19 annual shareholder meeting, Mr. Di Pietro and Mr. MacDonald will step down from chairing the nominating/governance and compensation committees, respectively. They will remain on the board, however.
Here is another recommendation on how to improve governance at Dye & Durham: Offer some clarity on how much Dye & Durham stock Mr. Proud owns, so shareholders can better decide how many options he needs to be incentivized.
Dye & Durham notes that an entity called Plantro Ltd. is its largest shareholder, with about $100-million worth of stock, that’s nearly 12 per cent of the company. It has grossed $116-million since July, 2020, from selling Dye & Durham shares.
A news release in December, 2012, that described Mr. Proud’s acquisition of Dye & Durham’s predecessor company called him the “sole shareholder” of Plantro. But footnotes in Dye & Durham’s prospectuses, dating back to its 2020 initial public offering, have said only that Mr. Proud “currently owns class-A non-voting shares of Plantro,” without quantifying them. And the company has said in past disclosures that Mr. Proud does not own any common shares of Dye & Durham.
The company declined yet again to answer questions about how Mr. Proud’s ownership of Plantro has evolved over time, based on these differing disclosures; why Mr. Proud doesn’t claim beneficial ownership of Plantro’s Dye & Durham stock in his own individual filings with SEDI, the system for insider reporting; and why Dye & Durham says he owns no common shares of software seller.
And unlike Glass Lewis, I will not revise my recommendation that Dye & Durham fix that problem.