In February, I reported that prospects were looking up at nano-cap CSP, Inc. (CSPI), one of the companies in my portfolio. See CSP Inc. (CSPI): How I Voted – Proxy Score 100. CSPI completed a number of reforms, including declassifying the Board. In addition, CSPI started paying a dividend and adopted a mandatory retirement age of 75 for directors, leading to some board refreshment. However, since then the NASDAQ has gone up by about 9%, while CSPI stock has gone down about 3%. I am a long-term investor, so am willing to give the current board more time to demonstrate their performance.
At the same time it is better to take preventive measures by continuing to improve corporate governance BEFORE problems arise. There is no more fundamental measure to ensure the Board’s accountability to shareowners than proxy access.
Entrenched Managers and Directors will only improve corporate governance when they can be held personally accountable, e.g. voted out of office and replaced by candidates nominated by Shareholders.
Therefore, primarily as a precautionary measure, I have drafted the following proposal for CSPI and am presenting it to readers your review, comment, and suggested revisions:
CSPI – Proxy Access for Shareholders
WHEREAS, CSP, Inc. (CSPI) has conducted value-destroying acquisitions leaving our company with two disparate businesses that lack synergies, while enriching management and the Board.
According to a 1/31/2013 ‘fight letter’ from North & Webste:
The Company has underperformed for 20 years. $10,000 invested in the Company twenty years ago would be worth $11,083 while that same $10,000 invested five years ago would be worth $7,348. Likewise, $10,000 invested in the NASDAQ Composite Index over the same time period would be worth $49,175 and $11,054 over those same time periods….
Three acquisitions cost stockholders approximately $7 million, yet the Company wrote off over $5 million… writing off the full cost of an acquisition only one year after the purchase!
Between 1/31/2013 and 7/31/2014, the NASDAQ rose 40%; CSPI stock rose 23%.
RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our governing documents to allow shareowners to make board nominations as follows:
1. The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:
a. Any party of one or more shareowners that has collectively held, continuously for three years, at least three percent of the Company’s securities eligible to vote for the election of directors, and/or
b. Any party of shareowners of whom 25 or more have each held continuously for two years a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least three percent of the Company’s securities eligible to vote for the election of directors.
2. For any board election, no shareowner may be a member of more than one such nominating party. Board members and officers of the Company may not be members of any such nominating party of shareowners.
3. Parties nominating under 1(a) may collectively, and parties nominating under 1(b) may collectively, make nominations numbering up to 20% of the company’s board of directors. If either group should exceed its 20% limit, opportunities to nominate shall be distributed among parties in that group as evenly as possible.
4. If necessary, preference among 1(a) nominators will be shown to those holding the greatest number of the Company’s shares for at least three years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for two years a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000.
5. Nominees may include in the proxy statement a 500 word supporting statement.
6. Each proxy statement or special meeting notice to elect board members shall include instructions for nominating under these provisions, fully explaining all legal requirements for nominators and nominees under federal law, state law and the company’s governing documents.
How Would Thresholds Apply at CSPI?
If the current number of board members and the market cap remained the same and the proposal was implemented as worded above:
- One set of shareowners, continuously holding about $830,000 of stock for three years, could place one nominee on the proxy, along with six director candidates named by the Board. They would need to agree on a candidate and coordinate submission of broker and/or bank letters evidencing ownership within a short time-frame.
- A second set of at least 25 shareowners, with no overlap from the first group, would also need to continuously hold about another $830,000 of stock, but only for two years instead of three. That would be an average of about 4,300 shares each, valued at about $33,000 each. In addition, they would need to agree on a candidate and coordinate submission of at least 25 broker and/or bank letters evidencing ownership within a short time-frame.
Of course, for either group, the more shareowner participants, the more difficult coordination issues would be. I have purposely required no overlap between the two groups. The idea is to bring fresh ideas and expertise to the board, not to form anything close to a controlling group. Any directors nominate by shareowners and subsequently elected to board would need at least one other director to even complete making a motion to be heard at a board meeting. We want directors working with, not against, each other.
Comments Wanted, Especially From CSPI Shareowners
The thresholds are higher than I would like, but proxy advisors have refused to endorse lower thresholds at other companies. The thresholds do, however, meet the standards of the Council of Institutional Investors, whose members have more than $3 trillion invested, and which maintains the following policy:
3.2 Access to the Proxy: Companies should provide access to management proxy materials for a long-term investor or group of long-term investors owning in aggregate at least three percent of a company’s voting stock, to nominate less than a majority of the directors. Eligible investors must have owned the stock for at least two years. Company proxy materials and related mailings should provide equal space and equal treatment of nominations by qualifying investors.
What do you think? I’m especially interested in hearing from CSPI shareowners. Please e-mail me your comments or post them in the comment field below.