Most of Target's board should go, proxy adviser recommends

  • Article by: KAVITA KUMAR , Star Tribune
  • Updated: May 29, 2014 - 6:07 AM

Seven of 10 members of Target’s board should be voted out by shareholders, a proxy adviser said.

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Institutional Shareholder Services recommend that Target Corp.'s shareholders replace most of its board of directors. ISS released a stinging critique of the board's oversight of the Minneapolis-based retailer.

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A prominent proxy adviser has recommended that Target Corp.’s shareholders oust seven of 10 board members at the retailer’s annual meeting next month, saying that those directors failed to protect the company against a massive data breach last year.

Institutional Shareholder Services (ISS), which provides counsel to investors, said members of Target’s audit and corporate responsibility committees should not be re-elected since risk assessment and oversight of reputational risk were part of their duties.

“The data breach revealed that the company was inadequately prepared for the significant risks of doing business in today’s electronic commerce environment,” ISS said in its report, released this week.

ISS went on to say that these two committees “should have been aware of, and more closely monitoring, the possibilities of theft of sensitive information” given Target’s significant exposure to customer credit card information and e-commerce.

In a statement, Target said Wednesday that the board views risk oversight a “full board responsibility.” As for data security issues, it said it had been among the “best-in-class within the retail industry” before the cyberattack.

“As one would expect, ­following the criminal attack that resulted in the data breach, the board is re-examining the entire risk oversight structure, including senior management roles and reporting structures, as well as board oversight,” the company said.

Target declined to make any representatives available for an interview.

ISS’ recommendations can be “highly influential” and are sometimes directly followed by mutual funds and other big institutional investors, said David Larcker, a Stanford business professor who focuses in corporate governance.

“It can move the vote 20 to 30 percent,” he said. “That can be a pretty big number.”

Another proxy adviser, Glass, Lewis & Co., however, is encouraging Target shareholders to wait before holding the board accountable for the data breach, noting that investigations are ongoing. For now, Glass Lewis said there is not enough evidence that the breach resulted from board or management neglect. It did recommend that shareholders reject two current board members, but for other reasons.

In their reports, ISS and Glass Lewis expressed support for a shareholder proposal to require an independent chairman by separating the role from the CEO. At last year’s annual meeting, that proposal failed after garnering just 37 percent of votes. But ISS said this could be even wiser to do now given the impact from the data breach.

In response, Target said the board prefers to have flexibility to determine which leadership structure best serves the company’s interests.

“The board believes there are many strong governance practices in place at Target that balance any risk of concentration of authority that may exist with a combined chair/CEO position, including the requirement to have an independent lead director in those situations,” the retailer said.

Even if it doesn’t swing the vote, the proxy adviser’s report will bring additional scrutiny to these issues, Larcker said. And it may put pressure on some board members if say, 45 percent of shareholders vote against them, he added.

“That’s a pretty uncomfortable position, and you may just resign,” Larcker said.

Last year, ISS recommended a “no” vote for three Wal-Mart board members amid the retailer’s foreign-bribery probe. All three of them kept their seats, but with less support than other board members.

This year, it is advising Wal-Mart shareholders to oppose the re-election of two board members. But ISS’ recommendations don’t have as much sway at Wal-Mart given that the Walton family owns about 50 percent of that company’s stock.

As for Target, it is no stranger to proxy fights. In 2009, activist investor Bill Ackman unsuccessfully tried to add himself and four others to the company’s board.

  • Proxy advisory firm Institutional Shareholder Services recommends that shareholders vote against directors that served on Target’s audit committee and corporate responsibility committee. That amounts to all but three of Target’s 10 directors. A second proxy advisory firm, Glass Lewis, recommends that investors vote against just two directors — Anne Mulcahy and James Johnson.

    ISS vote Director Year elected Affiliation

    recommendation

    Against Roxanne Austin 2002 Interim chairwoman of Target’s

    board, president of Austin In-

    vestment Advisors, an invest-

    ment and consulting firm

    For Douglas Baker Jr. 2013 Chairman, CEO of Ecolab Inc.

    Against Calvin Darden 2003 Chairman, Darden Develop-

    ment Group

    Against Henrique De Castro 2013 Former chief operating officer,

    Yahoo Inc.

    Against James Johnson 1996 Former CEO of Fannie Mae

    Against Mary Minnick 2005 Partner, Lion Capital

    Against Anne Mulcahy 1997 Chairman, Save the Children

    Federation Inc.

    Against Derica Rice 2007 Executive vice president and

    CFO, Eli Lilly and Co.

    For Kenneth Salazar 2013 Partner, WilmerHale

    For John Stumpf 2010 Chairman, president and CEO,

    Wells Fargo & Co.

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