CSPI: How I Voted – Proxy Score 0%

CSP Inc. (CSPI, $CSPI) is one of the stocks in my portfolio. Their annual meeting is coming up on 2/12/2013. ProxyDemocracy.org had no advice for me, since the company is so small.  I voted with management 0% of the time.  View Proxy,  Proxy SupplementSolicitation by North & Webster Value Opportunities Fund, LPLetter from North & Webster, and Response. See more at EDGAR. Re Warning: Be sure to vote each item on the proxy. Any items left blank will be voted in favor of management’s recommendations. (See Don’t Let Companies Change Shareholders’ Blank Votes)

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions where something obviously warrants different treatment. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay, Oxford Review of Economic Policy, Vol. 21, Issue 2, pp. 283-303, 2005), aggregate compensation by public companies to NEO increased from 5 percent in 1993-1995 to about 10 percent in 2001-2003.

Few firms want to admit to having average executives. They survey executive compensation at corporations and then set compensation packages that are above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third-world.

CSPI’s SummaryCompensation Table (page 14) shows Alexander Lupinetti, President and CEO (now deceased), was the highest paid named executive officer (NEO) at about $978,201 in 2012. I’m using Yahoo! Finance to determine market cap and Wikipedia’s rule of thumb regarding classification. According to those sources, at about $21.17M CSPI is nano-cap company. According to the United States Proxy Exchange (USPX) guidelines (pages 9 & 10), using data from Equilar, the median CEO compensation at small-cap corporations was $2.2 million in 2010. I don’t have any figures for nano-caps. However, given that the smallest small-cap is 1/5 the size of CSPI, paying the CEO almost $1M seems rather large.

More important are the issues raised by North & Webster and Brett Davidson of the CSPI Shareholder Forum. I won’t go over them all here but they are legion. While many of the complaints listed by both go back many years, even much more recent history appears questionable.

As the most recent letter from North & Webster points out, CSPI’s February 4th letter attempts to “paint a rosier picture than reality of CSP’s Fiscal 2012 fourth quarter results.”

In the letter, CSP claims to have achieved $4.9 million in fourth quarter net income, but North & Webster believes these numbers do not hold up to scrutiny when you consider that:

$2.6 million, or more than half, of this $4.9 million number was merely the non-cash write-up of a deferred tax asset, not actual earned income, and is thus misleading for the Company to use in its attempt to boost management’s performance and credibility;

$1.1 million of this $4.9 million came directly from life insurance proceeds, as stated by CFO Gary Levine on the December 13, 2012 earnings conference call; and

North & Webster estimates that at least $1.34 million of this $4.9 million came from “stuffing the channel” as the Company freely admitted in a December 13, 2012 press release where President and Chief Executive Officer, Victor Dellovo, stated, “Looking ahead, we expect that the recording of royalties for nine E-2D planes in 2012 versus only five that we had expected for fiscal 2012 will create a difficult year-over-year comparison in fiscal 2013.”  The Company booked revenues from nine planes in 2012, and two in the 4th quarter.

North & Webster estimates that the real income number for the 4th quarter was more like a loss of $140,000 and earnings for the full Fiscal 2012 were more like $1.1 million. To throw more salt on stockholder wounds, the CSP Board granted management approximately $1,314,693 in bonuses (ranging from 150-367% of targeted bonuses) based on what North & Webster believes were inflated numbers. These Board-approved bonuses doubled management’s yearly compensation.

If I had the ability to split my proxy, I’d consider that, but that doesn’t appear to be an option. I can’t split my ticket (i.e., vote for a combination of director candidates not reflected on either side’s individual proxy card) because the proxy card dated last automatically revokes the prior card. Of course, that can be avoided by voting in person on manual ballots distributed at the shareholder meeting.  For me, that would mean obtaining a legal proxy and spending the time and money necessary to attend the annual meeting on the other side of the county in Florida. My holdings aren’t large enough to make that a rational investment. Holding the meeting in Florida, when the company is headquartered in Massachusetts is another way our company’s executives are abusing their power. I’m sure attendance will be much lower than it otherwise would be.

Another option would have been to allow shareowners to nominate a minority of the board and have them placed on the corporate proxy. The company opposed that effort. The current management and board may now be having second thoughts, since that leaves dissatisfied shareowners little option, other than the solicitation by North & Webster.

I’m voting in favor of the North & Webster slate, against the say on pay proposal, for a say on pay frequency of once a year, and against ratifying the auditor. In other words, I’m voting against every recommendation of current management. If you are a retail shareowner but haven’t gotten your “gold” proxy card from North & Webster, call your broker. Don’t miss your chance to vote and end management abuses at CSPI. Voting to withhold your vote against directors on the CSPI proxy is not the same as voting in the affirmative on the North & Webster “gold” colored proxy. Make your vote count; vote the gold proxy.

Mark your calendar, here’s the deadline for submitting shareowner proposals for next year:

In order for a proposal of one of our stockholders to be considered for inclusion in our proxy statement and proxy card for our 2014 Annual Meeting of Stockholders, the proposal must comply with SEC Rule 14a-8 and any other applicable rules and must be submitted to our corporate secretary at our executive offices located at 43 Manning Road, Billerica, Massachusetts 01821 at least 120 days prior to the anniversary date of this proxy statement. This proxy statement is dated January 29, 2013, so the date by which proposals must be received under Rule 14a-8 will be October 1, 2013.

If the company hasn’t been sold by then and I still own the stock, I’ll probably file a proposal.

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