May 10--Imation Corp. shareholders came within inches this week of voting down the company's nonbinding proposal on executive compensation.
Next time, shareholders need to give serious thought to voting against the directors up for election, too.
It may be only a protest vote, but some protest is justified. Imation has been losing money and shrinking, but the board members aren't feeling much pain. Their compensation, by one measure, is twice national averages.
Consider that the average board compensation last year at Imation -- $288,883 -- is for just eight board meetings a year plus a few committee meetings. And the nonexecutive chairman was paid $443,000.
And $288,833 per director is way more than far healthier companies in Minnesota pay. G&K Services' seven outside board directors had an average compensation of $150,880, as calculated by the Star Tribune. The Tennant Co.'s outside directors got an average of $154,204. The number was $142,000 in a recent national survey of companies about Imation's size.
One reason directors' pay matters is that it sure seems to affect the pay of senior executives.
This is how Warren Buffett's famously blunt partner Charlie Munger last weekend characterized the relationship between the board's pay and CEO pay:
"You start paying directors of corporations two or three hundred thousand dollars a year, it creates a daisy chain of reciprocity where they keep raising the CEO and he keeps recommending more pay for the directors."
The directors are not paid all in cash, of course. At Imation each director gets a $50,000 retainer, plus $1,500 for each meeting and each committee meeting. Chairing a committee gets additional fees, and the chairman gets the most. Then there's the annual restricted stock grant -- worth $175,000 for each member, with $262,500 in restricted stock going to the chairman.
There's also a provision I haven't seen before: $1,500 for having to interview a potential director if it took any travel.
Imation's board members stopped getting options, valuable only if the stock rises, and now get only restricted stock. Given the usual direction of movement in the stock price, it isn't hard to see why.
At a recent price of $3.62, the shares of Oakdale-based Imation are worth less than a tenth of what they were 10 years ago. The five-year total shareholder return average was calculated by the proxy advisory firm Glass, Lewis & Co. at minus 19.2 percent. Over that same period, the average annual total return for a peer group of companies was 26.2 percent.
It's not that Imation has fallen on hard times, it's more that Imation has rarely had any good times.
The revenue for the terrible recession year of 2009 was $1.65 billion. The securities analysts who follow the company expect revenue for this year to be less than half that.
"It is a sign of the times at Imation that a 20 percent year-over-year revenue decline is considered in line with expectations," wrote Lake Street Capital Markets analyst Eric Martinuzzi after the company released its quarterly results in late April.
The company is aware that board compensation is an issue.
"Our total board of directors expense has gone down by 35 percent over the last five years," said John Breedlove, Imation's general counsel, in an e-mail. "We regularly engage outside advice on the appropriate level of board compensation. Our board understands that its compensation needs to reflect the fact that we are a smaller company than we were a few years ago, and we have already started that review process to review the current data."
To be fair, the turnaround of a declining business is not easy to pull off. And Imation's board is hardly stacked with mediocrities.
Trudy Rautio, the CEO of Carlson, was just re-elected. The board's chairman, L. White Matthews III, is a former chief financial officer of Ecolab.
Entrepreneur Glen Taylor, principal owner of the Timberwolves and prospective buyer of the Star Tribune, served on the board for 12 years before resigning in 2012 to spend more time on his own businesses.
But these folks have been in a system that appears unhinged from the kind of accountability most of us have in our jobs.
Maybe compensation comes down, as suggested by Breedlove, but it's also possible not much will change. A company like Imation is big enough to have plenty of money to shovel to its board members, but it's no longer big enough to get a lot of scrutiny, from investors or anybody else.
Only two analysts appear to be actively following the company. The largest shareholder is a global electronics company based in Japan. No activist shareholder is threatening an attempt to unseat the board.
Imation isn't the only small public company in this situation, of course, but there's a lesson here worth passing to young people now planning for their careers.
If you're looking for a safe, well-paying and secure profession, dental hygienist isn't bad, at about $63,000 per year.
Correctional officer? That average salary in Minnesota was just $45,120 in 2012.
But for a fabulously well-paying and secure job that leaves plenty of time for other activities, just try to get appointed to the Imation board.
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