If not for James A. Johnson on the slate, the shareholders of Target should have an easy call to make on electing directors.
The vote leading up to Wednesday’s annual meeting has turned into something other than the usual landslide for a corporate election. The main reason: Proxy adviser Institutional Shareholder Services has recommended that seven of Target’s 10 directors be ousted.
If shareholders do that, six won’t have been treated fairly. Johnson, however, should go.
The case that ISS makes against these directors is about the loss of financial and personal information belonging to at least 40 million consumers through a data security breach in late November and early December. These seven served on the audit committee or the corporate responsibility committee.
The audit committee at Target, like at all public companies, oversees financial reporting and compliance with both applicable laws as well as internal policies to prevent fraud. Its main job is to reasonably assure shareholders the books aren’t cooked.
This is the committee that meets with the partner of the audit firm outside of earshot of the management team. If the auditor has any concerns, this is the place he or she is supposed to raise them.
ISS argued that the Target audit committee oversaw other processes that mitigate risk, and thus failed to properly see the threat of theft of customer data. As for the corporate responsibility committee, ISS said it also failed to fully grasp the risk of theft, which led to the blow to Target’s reputation when it got hacked.
This is, simply put, nonsense. It’s the management team’s job to protect the data, and it’s management’s job to demonstrate to the board how it is doing that. There is no reason to think the latter did not happen, in enough detail to assure the most skeptical director.
The recommendation to oust directors for failing to see a reputation black eye is particularly odd.
ISS had a better argument against the whole board for capital allocation decisions. By hanging tough on its earnings-per-share targets, Target seemed to value profitability and ensuring funds for share repurchases over other goals. Maybe a corner got cut in data security as a result.
Is that a stretch? Perhaps, but allocation of capital is at least a decision the board would own.
The best argument is that the board completely failed to hold management accountable. Except, of course, this board did, easing CEO Gregg Steinhafel out the door in early May.
Johnson is no more responsible for Target getting hacked than any of the others, but he should have long since been gone from this board because of his disastrous turn as CEO of Fannie Mae. While he’s managed to remain a statesman, he is as responsible as anybody for putting in motion the practices that led to the 2008 economic collapse while collecting Wall Street levels of compensation to do it.
Lots of folks helped, of course. It was the mortgage underwriters and the investment banks that conspired to create, slice and package ever-more-junky home mortgages into bonds that they peddled to naive investors. It was a confidence game, and big money was to be made until the whole mortgage market collapsed, taking other parts of the capital markets with it.
While apparently not nearly as popular as the Wall Street and mortgage broker greed narrative, another story told about the subprime collapse was that it’s all the government’s fault.
Through government-sponsored mortgage finance companies like Fannie Mae, the government created a false ownership class of subsidized homeowners. Many of these folks never should’ve been encouraged to take on obviously unaffordable mortgage debt, and they later got hurt badly.
These quasi-government companies were big players in shaping that policy. They co-opted antipoverty activists, shamelessly lobbied influential members of Congress and created “AstroTurf” letter-writing campaigns in support of their goals.
As the proxy firm Glass, Lewis & Co. observed in its recent recommendation against Johnson, an internal investigation by Fannie Mae that was completed in 2006 “revealed accounting practices inconsistent with [generally accepted accounting principles] during Mr. Johnson’s tenure at that company.”
One reason the numbers were massaged was to ensure that he got a bonus, and the bonuses did mount up. Johnson reportedly received about $100 million at Fannie Mae by the time he stepped down in the late 1990s.
In 2008, the Feds were forced to take over Fannie Mae, and while much of the government bailout money has been paid back, at one point the total cost to taxpayers swelled to well over $100 billion.
Johnson joined Target’s board in 1996, while he was the boss at Fannie Mae. Even after he was the subject of a blistering 2011 book on the mortgage crisis called “Reckless Endangerment,” he stayed on Target’s board.
Target’s proxy does not mention his service at Fannie Mae, but investors don’t need reminding. About 13 percent of the shares were voted against his candidacy at the 2013 annual meeting, and about 10 percent in 2012. This may be the year Johnson goes.
Election for directors, by the way, is not like election night for governor. Companies get daily vote totals leading up to the annual meeting and those controlling big blocks of stock can switch their vote up until the last minute. The voting ends Tuesday night one minute before midnight East Coast time.
Companies confident in their slate don’t send out letters to shareholders like the one Target’s interim chairwoman did last week defending the board in the face of the ISS recommendation.
If the shareholders boot seven directors this week, Target would have to find replacements. No national search would likely turn up a half-dozen directors more competent and experienced than the ones serving now.
On the other hand, it would be virtually impossible to find a candidate with a background quite like Johnson’s.
That’s a good thing.