HCA Healthcare says it wants to toss its rule requiring affirmative votes from the owners of 75% of its outstanding shares in order to make certain changes to the company.
Ironically, they will need that very supermajority vote to get rid of the requirement, which some say is already a very high hurdle for approval.
"There is a question as to whether it will even pass, even though it's generally viewed as shareholder friendly," said Joshua Apfelroth, a partner in Cadwalader, Wickersham & Taft's corporate group. "Just as a mechanical matter, are they even going to be able to get the 75% vote?"
Stockholders will vote on that and four other proposals at the Nashville-based hospital chain's annual meeting on April 26, including executive compensation and nominees to its board of directors, according to HCA's proxy statement. HCA wrote in the filing that some shareholders and commentators oppose the supermajority provision because they feel it limits the board's accountability to stockholders and stockholders' ability to participate in corporate governance.
HCA, whose representatives declined to comment beyond the proxy statement, wrote in the filing that in the latter part of 2018, its compensation committee chair and members of management met with about 20 of its largest stockholders, excluding the founding family's Hercules Holdings II, representing about 40% of the company's common stock. Conversations focused on the company's board leadership, pay philosophy and corporate governance practices.
"In connection with these outreach efforts, we generally found that the stockholders with whom we had an opportunity to engage were comfortable with our leadership and compensation and governance practices," the company wrote.
If the change passes, only a majority vote of all outstanding shares would be required for stockholders to approve changes to HCA's bylaws or provisions within its certificate of incorporation, including the company's purpose, board size, the right of stockholders to call special meetings and act by written consent, among others.
A similar proposal to allow stockholders to request special meetings narrowly failed to garner a supermajority vote in 2017. Stockholders owning 72% of shares, or nearly 268 million out of about 370 million outstanding shares voted in favor of the change, according to a company filing. The 'yes' votes represented 83% of the 323 million shares represented at the meeting.
As of February 15, members of the Frist family, including HCA founder Dr. Thomas F. Frist, Jr. owned about 20% of HCA's common stock, according to the proxy statement, through their investor group Hercules Holdings II.
The fact that the Frist family has the power to block certain changes from passing makes it less surprising that HCA would propose getting rid of the supermajority requirement and more likely that shareholders will want to voice their concerns, Apfelroth said. And HCA might benefit from the fact that it's proposing the change voluntarily rather than waiting for a shareholder proposal, he said.
"You get points, if you will, for doing it voluntarily, but also you get to implement it in a manner that you're comfortable with without it being forced upon you by your stockholders," Apfelroth said.
Lawrence Prybil, a community professor in the University of Kentucky's College of Public Health, said he views this as above all a board-friendly move because it would increase the board's ability to pass its own proposals. If the board wants to change its size or the purpose of the company, for example, it would only need 51% of votes to do so, instead of 75%.
"It certainly makes it easier for the board to do certain things," Prybil said.
Stockholders will also vote on HCA's 2019 executive compensation program. The company said it did not change the program from 2018 based on the overwhelming support the program received from stockholders. Last year, about 91% of votes cast approved of the executive compensation plan. Stockholders are able to cast non-binding, advisory votes through a process called say-on-pay.
Former CEO R. Milton Johnson's $21.4 million in total 2018 compensation was 383 times that of HCA's median employee pay as of Dec. 31, 2018: $55,977. Johnson stepped down at the end of 2018 and was replaced by Sam Hazen, the company's former chief operating officer. Johnson's 2018 compensation was up from $17.3 million in 2017.
All of HCA's top executives got raises in 2018. Hazen made $10 million last year, up from $9.5 million in 2017. Bill Rutherford, the company's chief financial officer, made $6.8 million in total compensation, up from $4.9 million in 2017. Jon Foster, president of HCA's American Group, made $4.5 million last year, up from $4.2 million in 2017. Charles Hall, president of HCA's National Group, made $4.1 million, compared with $3 million in 2017.
Executives' total compensation includes base salary, stock awards, stock appreciation rights, incentive pay, changes in pension value and deferred compensation earnings. A portion of their pay hinges on hitting annual financial and quality performance targets, including earnings before interest, taxes depreciation and amortization. HCA posted EBITDA of $9.2 billion in 2018, compared with a target of $8.8 billion. Executives saw higher pay for hitting that as well as infection control, patient experience and other quality measures.
To formulate executive compensation, HCA wrote that it examined compensation data on public healthcare companies with more than $20 billion in revenue, including pharmaceutical companies like Eli Lilly, Merck and Pfizer and health insurers like Aetna, Cigna and Centene. It also looked at companies within its own industry, including Community Health Systems and Tenet Healthcare.
