Notice of Exempt Solicitation. Definitive Material. (px14a6g)
May 17 2017 - 3:36PM
Edgar (US Regulatory)
May 17, 2017
Please vote on June 14, 2017, at the annual meeting of
Caterpillar, Inc. (NYSE: CAT):
1.
AGAINST
the re-election of Directors Daniel Dickinson, Dennis Muilenburg, and William Osborn;
and
2.
FOR
Proposal 10, amending the company clawback policy.
Dear Caterpillar shareholder,
Caterpillar, Inc. stands at a critical juncture. With $2
billion in income taxes and penalties assessed by the Internal Revenue Service
(“IRS”), a Senate investigation finding that the company avoided paying $2.4
billion in taxes through an abusive tax shelter, possible charges of tax fraud,
1
and an ongoing
federal investigation that may preclude the company from participating in
lucrative government contracts, the overwhelming liabilities associated with
Caterpillar’s offshore tax structure have reached a tipping point requiring
director level accountability.
As a consequence, shareholders must clearly signal to the
board that the long term regulatory risks of the tax strategy outweigh its
financial benefits by voting AGAINST Directors Dickinson, Muilenburg and
Osborn. Shareholders should also vote FOR Proposal 10, to amend the company’s
clawback policy to include events that may result in reputational damage to the
company.
For investors the following are of immediate concern:
·
Failure of Risk Oversight Despite Multiple Warnings:
Caterpillar Audit Committee’s failure to manage the risks associated with the
offshore tax structure, despite warnings by both internal and external parties,
calls into question the effectiveness of the members of the Audit Committee. At
least two employees and the company’s internal risk assessment system had warned
of the risks of the offshore tax plan, all of which the Audit Committee appears
to have ignored. Further, Caterpillar continued to implement the offshore tax
structure despite significant scrutiny from federal regulators, as well as
shareholders themselves through various lawsuits.
·
Auditor Conflict of Interest:
The Audit Committee has
failed to manage the conflict of interest presented by PricewaterhouseCoopers
(“PWC”), which both developed the tax avoidance scheme and continues to be responsible
for the company’s external auditing. Caterpillar also has a history of a
revolving door of employees with PWC, including the current CFO. The failure
to address PWC’s conflict of interest raises concern over the Audit Committee’s
commitment to independent review of the accuracy of the company’s financial
statements, and the Audit Committee’s overall supervision of the company’s
external audits.
·
Audit Committee Composition is in Urgent Need of Change:
Messrs.
Dickinson, Muilenburg, and Osborn have sat on the committee for the duration of
the IRS and Senate investigations. In fact, Committee Chairman Osborn has sat
on the board almost since the inception of the tax strategy, over 15 years.
Given their long tenure and the Audit Committee’s lack of response, we question
these directors’ ability to provide adequate oversight of the ongoing federal
investigation of the offshore tax structure and outside auditors.
1
The company is contesting the IRS assessments.
·
Stronger Pay Accountability:
Strengthening the clawback
policy by including recoupment of pay for conduct that might result in significant
reputational damage to the company is a common sense reform and is particularly
warranted at Caterpillar given the potential liabilities associated with the
offshore tax structure.
As Caterpillar’s performance slowly improves, it is even
more critical that the board take a fresh look at the company’s risk mitigation
practices so that the reputational costs of the tax strategy do not derail the
company’s recovery. Although we recognize the addition of Rayford Wilkins to
the board and the Audit Committee, three of the four members of the committee,
entrusted with monitoring the company’s tax compliance and risk management
framework, have sat on the committee for the duration of multiple
investigations. Yet Caterpillar appears to have continued to implement the tax
strategy for over 15 years. For all of these reasons, we urge a vote against
the three directors and a vote for the clawback proposal.
The CtW Investment Group works with pension funds sponsored
by unions affiliated with Change to Win, a federation of unions representing
nearly 5.5 million members, to enhance long term shareholder value through
active ownership. These funds invest over $250 billion in the global capital
markets and are substantial investors of Caterpillar. We previously engaged
with the company over executive compensation issues for the past two years.
The Company’s Response to Multiple Warnings Regarding the
Offshore Tax Strategy Has Been Inadequate
Since its inception in 1999, Caterpillar’s offshore tax
structure has been subject to both internal and external scrutiny. In 2004, the
company’s CEO and tax department received an anonymous letter warning that the
tax strategy had no legitimate business purpose. Further, in 2007, the company’s
own Global Tax Strategy Manager, Daniel Schlicksup, raised concerns with the
company’s legal department, ethics office, and Executive Office
2
that the tax
scheme was being conducted for tax avoidance purposes only, stating that “the
pressure to look the other way is overwhelming.”
3
Caterpillar’s tax department created a tax risk rating system in 2006 that
evaluated elements of the Swiss tax strategy, and subsequently gave those
elements a “high” risk rating. Rather than eliminate the Swiss tax strategy,
however, the company attempted to reduce the rating. When it was unable to do
so, the company eliminated the rating system altogether in 2008. At several
points throughout the first nine years of the tax strategy, Caterpillar’s own
employees and rating system warned the company that its offshore tax strategy
created undue risks, yet Caterpillar appears to have continued its
implementation as if these warnings did not exist.
Additionally, the tax strategy has been subject to several
investigations, even before the March 2017 raid of Caterpillar’s facilities. According
to the IRS investigation in 2013 and Senate investigation in 2014, the company’s
executives and directors participated in improper and potentially illegal
conduct by engaging in an offshore tax strategy, avoiding the payment of nearly
$2.4 billion in taxes, and failing to disclose to the Securities and Exchange
Commission (“SEC”) and investors the status of IRS’ findings
against
these arrangements. The company has also been subject to pending lawsuits and
grand jury investigation related to Caterpillar shifting its profits to benefit
from the lower Swiss tax rate. Each of these investigations and lawsuits, and
the reputational and financial liability associated with them, call into
question the Audit Committee’s ability to provide adequate risk oversight
regarding the company’s tax strategy over the long term.
2
This included then group president Douglas Oberhelman. Mr. Oberhelman would
later become CEO and Chair, and recently stepped down from the board.
3
Peoria Journal Star
, “Roots of Caterpillar Raid Reach Back Years,”
available
at
http://www.pjstar.com/news/20170304/roots-of-caterpillar-raid-reach-back-years.
The Audit Committee has Failed to Manage PWC’s
Conflict of Interest.
We are particularly worried over the conflict of interest
resulting from the continued role of PWC as Caterpillar’s external auditor for
over 80 years.
4
In 1999, Caterpillar paid PWC $55 million to create the very offshore tax
strategy that PWC now evaluates as part of the annual audit process.
Furthermore, Caterpillar has a history of relying on former employees of PWC to
lead the company’s finance and tax departments. The company’s current CFO,
Bradley Halverson, started his career at PWC before joining Caterpillar. David
Burritt was an auditor with PWC prior to joining the company, as its Chief
Accounting Officer and later its Chief Financial Officer, from 2004-2010. Additionally,
Robin Beran, Caterpillar’s Chief Tax Officer until 2015 (who provided allegedly
false testimony to the Senate
5
)
was also a former PWC partner.
The conflict of interest presented by PWC and the shared
personnel between the two entities is especially concerning in light of the
high degree of regulatory scrutiny that the company’s tax strategy has
received, even prior to the federal raid on March 2
nd
. The Audit
Committee’s failure to replace PWC as the company auditor raises serious concerns
over the Committee’s ability to recognize real conflicts of interest that
endanger the quality of the company’s auditing and financial statements.
The Audit Committee’s Composition is in Urgent Need of
Change
Despite the risk of a $2 billion assessment by the IRS and
the possibility of charges of tax fraud, the company has continued to rely on
the offshore tax strategy. By leaving the company open to these risks,
shareholders have little option but to hold Directors Dickinson, Muilenburg,
and Osborn accountable.
Further Directors Dickinson, Muilenburg and Osborn sat on
the Audit Committee during the IRS investigations and Senate hearing related to
the tax strategy in 2013 and 2014, respectively. In fact, Audit Committee
Chair Osborn has sat on the board effectively since the tax strategy began,
over 16 years. Given the events that have taken place during their tenure, and
the company’s scant response, we question these directors ability to provide
adequate oversight with regards to the ongoing federal investigation of the
offshore tax structure.
4
Caterpillar’s Offshore Strategy, Permanent Subcommittee of Investigation, U.S.
Senate, Majority Staff Report (“PSI Reprt”), p. 41.
5
A memorandum prepared by Senate staff cites
contradictions between Mr. Beran’s testimony and other evidence in the record.
See
False Testimony Related to IRS’ Position
on Caterpillar’s Tax Liability
, Hearing Before the Permanent Subcommittee
on Investigations of the Committee on Homeland Security and Government Affairs,
Caterpillar’s Offshore Tax Strategy, p. 633,
available at
https://www.gpo.gov/fdsys/pkg/CHRG-113shrg89523/pdf/CHRG-113shrg89523.pdf
.
Stronger Pay Accountability is
Needed Now More than Ever
Findings from the Senate investigation demonstrate that Caterpillar
executives were aware of the risks associated with the tax scheme, but
nonetheless agreed to the arrangement, improperly reporting profits and
enriching themselves in the process through their equity compensation awards.
For example, internal company documents from 2008 estimated an annual tax
benefit of $250 - $300 million per year and $0.40 - $0.48 profits per share.
6
An accounting
professor responsible for a recent government-sanctioned report on the
company’s possible accounting fraud has also stated that “the company’s
noncompliance with these rules was deliberate and primarily with the intention
of maintaining a higher share price.”
7
Given the potential damage to the company, both reputation and otherwise, as a
result of its tax strategy, shareholders should take immediate action to strengthen
executive pay accountability by adopting the changes to the company’s clawback
policy, as outlined in Proposal 10.
Conclusion
:
As shareholders, we must send the board a clear message at
this year’s shareholder meeting on June 14
th
that we are exasperated
by the board’s continued disregard of the apparent risks of Caterpillar’s offshore
tax strategy. Therefore, we urge you to vote AGAINST the re-election of Audit
Committee Members Dickinson, Muilenburg, and Osborn and FOR Proposal 10, the
shareholder proposal amending the company’s clawback policy.
Please contact my colleague Tejal K. Patel at tejal.patel@ctwinvestmentgroup.com
with any questions.
Sincerely,
Dieter Waizenegger
Executive Director, CtW Investment Group
This is not a
solicitation of authority to vote your proxy. Please DO NOT send us your proxy
card as it will not be accepted.
7
Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud
,
NYT,
available at
https://www.nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html?smid=nytcore-ipad-share&smprod=nytcore-ipad
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