Discontent is rising among Palo Alto Networks shareholders, with a plurality opposing three board nominees in the past two years and executive pay for three years running.
Just 23 percent of Palo Alto Networks shares voted in favor of re-electing ex-VMware President and COO Carl Eschenbach to the company’s board of directors Wednesday, with 60.3 percent of shares opting to withhold their support. Similarly, Google CMO Lorraine Twohill received support from just 36.9 percent of shares for her re-election, while 46.3 percent of shares declined to support her nomination.
The only nominee to receive plurality support for re-election to the board was Chairman and CEO Nikesh Arora, with 49.4 percent of shares supporting his bid and 33.8 percent of shares withholding their support. The remaining 16.8 percent of shares for the 2020 director elections were broker non-votes, meaning that the investors didn’t provide instructions on how their shares should be cast.
Palo Alto Networks declined to comment beyond what was in its Securities and Exchange Commission filings.
This comes a year after a plurality opposed re-electing Greylock Partners’ Asheem Chandna to the board, with 38.9 percent of shares favoring the appointment and 43.8 percent of shares declining to support it. In contrast, all three of Palo Alto Networks’ 2018 board nominees were re-elected with no less than 72.1 percent of shares supporting and no more than 8.9 percent of shares declining to support.
“Shareholders have the option to express dissatisfaction with a candidate by indicating that they wish to ‘withhold’ authority to vote their shares in favor of the candidate,” the U.S. Securities and Exchange Commission said on its website. “A substantial number of ‘withhold’ votes will not prevent a candidate from getting elected, but it can sometimes influence future decisions by the board of directors concerning director nominees.”
Palo Alto Networks uses a plurality system, meaning a nominee running unopposed will automatically be elected to the board if a single vote is cast in their favor. All the company’s board nominees have run unopposed for at least the past three years, meaning that the withheld votes haven’t impacted the outcome.
Conversely, publicly traded companies can elect directors using a majority system, meaning that a candidate must receive a majority of the votes cast to be elected. Although nearly 90 percent of S&P 500 companies use majority voting in some form, just 29 percent of Russell 2000 companies use a majority vote standard in uncontested elections, according to FactSet.
Ex-AT&T Communications CEO John Donovan, who’s now the lead independent director on Palo Alto Networks’ board, took the unprecedented step of writing an additional letter to company shareholders Nov. 30—a month after the company’s proxy statement was filed—once again urging them to support the re-election of Arora, Eschenbach and Twohill to the board.
“We strongly believe that criticism of these directors [Arora, Eschenbach and Twohill] in connection with Asheem Chandna receiving a lower than usual level of support in 2019 is unwarranted,” Donovan wrote in the Nov. 30 letter to stockholders. “The lack of support that Mr. Chandna experienced was due to his status (through his employer) as an investor in a company that we acquired.”
Chandna indirectly benefited to the tune of US$1.75 million from the company’s March 2019 acquisition of Demisto for US$560 million, according to a filing with the SEC. Chandna recused himself from board discussions around the acquisition since he had an investment interest, said Donovan, adding the company has benefited from his deep product expertise.
And for the third consecutive year, shareholders objected to the pay packages given to Palo Alto Networks’ top leaders. Only 33.3 percent of shares voted in favor of the company’s executive compensation plan in the 2020 fiscal year, with 49 percent of shares opposed to an arrangement that resulted in more than US$15 million of total compensation for incoming CFO Luis Felipe Visoso. Some 16.8 percent of shares were broker non-votes, while only 0.9 percent of shares abstained from the vote.
Visoso spent just 22 business days at Palo Alto Networks during the firm‘s 2020 fiscal year, which ended July 31. In addition, Palo Alto Networks spent US$590,000 on personal security costs for Arora during fiscal 2020 after not disclosing any spending around Arora’s personal security in either fiscal 2018 or fiscal 2019.
The executive compensation vote is non-binding, meaning that Palo Alto Networks is not forced to take any specific action. Still, it is incredibly rare for advisory executive compensation votes to fail, with just 2.3 percent (52 of 2,248) of Russell 3000 companies having their compensation proposals rejected this year, according to a Sept. 24 analysis from executive compensation consulting firm Semler Brossy.
For Palo Alto Networks, though, this is the third consecutive year stockholders have opposed their executive pay plan. Only 14.6 percent of shares voted in favor of the company’s executive compensation plan in fiscal 2019, with 67.3 percent of shares opposed to an arrangement that resulted in more than US$170 million of compensation for the company’s top leaders.
And in fiscal 2018, only 17.1 percent of shares voted in favor of the compensation plan, with 63.7 percent of shares opposed to an arrangement that resulted in more than US$125 million of total compensation for then-incoming CEO Arora.