By Paul Ziobro
A prominent proxy adviser took the unusual step of recommending
that Target Corp. shareholders oust seven of the company's 10
directors, citing what it called the board's failure to manage risk
and protect the retailer from a massive data breach.
Institutional Shareholder Services, which advises big
shareholders like mutual funds how to vote on corporate issues,
focused on directors who serve on Target's audit and
corporate-responsibility committees. Those committees oversee and
manage risk, and the data breach showed the company was
inadequately prepared for the threats posed by hackers.
"It appears that failure of the committees to ensure appropriate
management of these risks set the stage for the data breach, which
has resulted in significant losses to the company and its
shareholders," ISS wrote.
ISS, which rarely recommends voting against a majority of the
board, added that actions Target took in response to the breach,
like replacing the chief information officer and beefing up its
security protocols, appear "largely reactionary" and could have
prevented the data breach from occurring had the company
implemented them sooner.
Another proxy advisory firm, Glass, Lewis & Co., said there
wasn't enough evidence yet that the data breach was due to any
neglect by Target's board or its executives. But the firm said it
may recommend voting against certain directors next year if
Target's internal review or other investigations find the board or
management didn't do enough.
In response to the criticism on Wednesday, Target's board said
overseeing risk is the responsibility of the entire board and is
part of the board's continuing review of the company's strategy. It
also said that Target's security measures were "among the
best-in-class within the retail industry," adding that it had made
significant investments in data security and that its payment
systems had been compliant with industry guidelines.
The ISS report is the latest criticism to emerge against
Target's handling of the breach, which compromised 40 million
credit- and debit-card numbers weeks before Christmas. The report
is among the first to lay blame squarely on the board.
The recommendation calls for voting against seven of the 10
directors, including two of Target's longest-serving members:
former Xerox Corp. Chief Executive Anne Mulcahy and the onetime
head of Fannie Mae and lead independent director James Johnson. The
firm recommends voting for Kenneth Salazar, the former U.S. senator
who leads the corporate responsibility committee and joined the
board only last July, as well as two members who didn't serve on
the audit or oversight committees.
So far this year, ISS has called for voting against or
withholding approval for a majority of board nominees at only 11 of
421 companies in the S&P 500.
Glass Lewis also advised shareholders to vote against Mr.
Johnson and Ms. Mulcahy, but for reasons unrelated to the data
breach. The advisory firm took issue with their roles on other
boards.
In the case of Mr. Johnson, Glass Lewis also pointed to his role
as chairman of Target's compensation committee at a time when
lavish pay packages for the retailer's top executives were
criticized as being out of sync with the company's poor
performance.
This year Target revamped its compensation program to tie pay
packages more to the company's performance. It also cut total
compensation of Gregg Steinhafel, who resigned as chairman and CEO
earlier this month, in part for his handling of the data
breach.
The votes will be counted for Target's annual meeting, scheduled
for June 11.
Both firms agreed on approving a shareholder proposal to
separate the roles of chairman and chief executive, a proposal
voted down at last year's shareholder meeting. ISS said Target's
weak performance and the data breach showed that the dual role of
CEO and chairman didn't provide enough oversight of management.
The company has an interim chairman and a separate interim CEO
as it searches for a new chief. In its proxy statement filed with
the Securities and Exchange Commission, Target argued against the
proposal to separate the two roles, saying its current structure of
a lead independent director provides enough oversight.
Target's board wants to have flexibility to determine the proper
structure of the board. It hasn't made a decision on whether it
will continue with an independent chairman and plans to revisit the
leadership structure when it appoints a permanent CEO.
Roxanne Austin, the interim chairman, is among the directors ISS
has targeted for defeat.
Joann S. Lublin contributed to this article
Write to Paul Ziobro at Paul.Ziobro@wsj.com
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