American Airlines Board Faces Shareholder Vote To Loosen Management’s Grip After Profits Collapsed 87%

American Airlines will hold its annual shareholders meeting on June 10th. A couple of weeks ago I walked through key details from the meeting proxy materials and from the airline’s annual SEC 10-K.

One of the proposals, which I didn’t mention earlier, is to change how board voting is done. I didn’t walk through it because these proposals rarely pass, but it’s interesting to see an accountability effort rising to the level of a shareholder vote at the annual meeting. The National Legal and Policy Center makes the case for it.

• American generated nearly $55 billion in operating revenue, but net income was down 87% to just $111 million – while Delta and American earned billions. Things look even worse when you consider $6.2 billion in cash payments from its cobrand credit card, which translates to roughly $3 billion in profit. They’re hobbled by $35 billion in debt.

• Cost pressure, especially labor, wiped out profits. Salaries, wages, and benefits rose $1.5 billion (9.6%). CEO Robet Isom received pay equal to 12.5% of the airline’s net income. His comp fell only 11% despite the significant drop in performance. He’s get $41 million if American were acquired and he was fired. Meanwhile, another proposal at the meeting is to limit officer liability.

• $100 invested in the stock at year-end 2020 was worth $97 at year-end 2025, versus $182 for the S&P 500.

The airline’s governance and compensation appears to protect leadership from the consequences of poor performance, lackluster returns, heavy debt and underinvestment in product. And this is a board that’s never held management accountable for repeated failure over the past decade.

At the shareholders meeting, Proposal 7 is an advisory proposal asking American’s board to adopt cumulative voting for director elections.

• instead of voting one share once for each board seat, a shareholder would
  
• get votes equal to shares owned × number of directors being elected
  
• allowing shareholders to concentrate their votes on a single independent candidate, making it more likely that a non-management approved director might get elected.

The American Airlines board unanimously recommends AGAINST Proposal 7. They argue that the company already has annual elections and this holds the board accountable, and cumulative voting risks directors being elected to represent narrow interests rather than all shareholders.

This is actually the point, it makes it possible for one or a minority of directors to represent narrow interests – and proponents would argue that ‘narrow interest’ is an interest that is “other than management.”

The proposal requires approval by a majority of shares represented at the meeting, with absentions counting as a no (althogh broker non-votes have no effect). And it’s advisory only – it would require board action plus a follow-up charter amendment vote.

It is likely to fail. Just as this board doesn’t hold management accountable, institutional shareholders rarely hold boards accountable. And there’s some for why.

• Blackrock has been an activist fund manager in the past (largely for ESG types of governance issues) but in general they represent individual shareholders who own the shares because they want to, not because they’re trying to change the company, or they own the shares simply as part of an overall basket or index.

• Disney had a similar proposal this year that received less than 3% of votes.

• Last year, American Airlines directors received 97-99% support in their elections at the annual meeting. These shareholders aren’t trying to rock the boat.

Another approach might be a targeted campaign against a single director – that probably wouldn’t scuttle their re-election but that could be easily understandable and focus attention, especially if it were a member of the compensation committee.

After all, the airline made just $111 million last year, while top officers and the board were paid $50 million. And the CEO’s pay barely went down, even as the airline’s financial performance plunged over 85%.