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The Science of Hitting
The Science of Hitting
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Chairman/CEO Split Nearly Passes at PepsiCo

May 07, 2012 | About:

PepsiCo (PEP) held its Annual Meeting on May 2 (transcript here) in New Bern, N.C., where pharmacist Caleb Bradham originally made “Brad’s Drink,” now known as Pepsi-Cola.

The event began with some opening remarks from Chairman and CEO Indra Nooyi, which discussed the company’s results for fiscal year 2011 and included the announcement of a 4% dividend increase ($2.15 annualized) for 2012. However, it is a shareholder proposal that caught my attention more than anything else:

“Shareholders request that our Board of Directors adopt the policy that, whenever possible, the Chairman of our Board of Directors shall be an independent director, who has not previously served as an executive officer of our company. This policy should be implemented so as not to violate any contractual obligations in effect when this resolution is adopted.

The policy should also specify how to select a new independent chairman if a current chairman ceases to be independent between annual shareholder meetings. To foster flexibility, the proposal gives the option of being phased in and implemented when our next CEO is chosen. This proposal topic won 50%-plus support at 4 major U.S. companies in 2011. The text of this Proposal 7 is on Page 72.”

Indra’s response to this proposal was the following (with bold added):

“Thank you very much, Mr. Washington. Let me share with you our board's point of view on this topic as outlined in the Proxy Statement. We believe the board should retain the flexibility to determine the most effective leadership structure for PepsiCo. PepsiCo's governing documents allow our board flexibility to determine whether the roles of the Chairman and Chief Executive Officer should be separate or combined, based upon the company's needs and the board's assessment of PepsiCo's leadership from time to time. Our board carefully reviews PepsiCo's leadership structure on a regular basis, as the decision about who should lead the company is one of the most important responsibilities the board has to its shareholders.

I highlight to you that PepsiCo has strong corporate governance practices in place to provide for board independence and effective management oversight. For example, whenever the Chairman of the Board is not an independent director, the independent members of the board elect an independent director to act as the presiding director. The presence of an active and independent presiding director provides for independent oversight of management and meaningful coordination between the Chairman and the independent director.

We believe that it's critical for our board to retain the ability to choose the most effective leadership structure for PepsiCo because the board is in the best position to make this determination. We recommend that the shareholders do not support this proposal.”

Let’s take a look at what the presiding director is responsible for, as highlighted in the proxy statement:

“PepsiCo’s Corporate Governance Guidelines require that if the Chairman of the Board is not an independent director, an independent director shall be designated as the Presiding Director by the independent members of the Board based on the recommendation of the Nominating and Corporate Governance Committee. The position of Presiding Director rotates among the independent directors of the Board for a three-year term, and the Board evaluates the Presiding Director’s performance annually under the guidance of the Nominating and Corporate Governance Committee. PepsiCo’s Presiding Director is required to: (a) preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors; (b) serve as a liaison between the Chairman and the independent directors; (c) provide advice regarding information sent to the Board; (d) approve meeting agendas for the Board; (e) approve meeting schedules to assure that there is sufficient time for discussion of all agenda items; (f) have the authority to call meetings of the independent directors; and (g) if requested by major shareholders, ensure that he or she is available for consultation and direct communication.”

The current presiding director is Ray Hunt, 68; while I find some parts of this setup questionable (the responsibilities seem limited, and the three year term plus rotation is odd), it’s nice to see that Mr. Hunt owns 1 million shares in PepsiCo stock, significantly more than some key executives such as Eric Foss (200,000) and Hugh Johnston (284,000).

At the vote, the proposal was voted down, but received 44.67% approval, suggesting that many shareholders are unhappy with the current setup. As a PepsiCo shareholder, I believe that splitting the chairman and CEO roles would be beneficial, and add a layer of accountability that should be of no concern to a chief executive that is running the business in the long term interest of shareholders; I hope management recognizes that others seem to agree.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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