Drip-drip-drip — We have to patch that hole before it sinks us

USS_Towers_DDG-9_sinkingMr. Jim Romenesko continues to be spattered with leaks from Patch, the local news arm of AOL, which he promptly, like a dog shaking off the wet, publishes on his blog (here.)

I have followed this leakage with, frankly, an increasing sense of amazement, starting with the leaking of the less than graceful and very public firing of Patch employee Mr. Abel Lenz by Mr. Tim Armstrong, the CEO of AOL (read about this here.)

Recently, the sales objectives of Patch were leaked in the form of two memorandums written by Mr. Jim Lipuma, Patch’s head of sales in the United States, and we promptly dissected this information in a posting (here,) where we arrived at the following conclusion:

    If we assume 260 working days, Patch’s sales people in the United States needs to secure $26 million per year in net new sales.

    If we instead assume that the days that Mr. Lipuma is referring to are calendar days (more likely, I think,) then Patch’s sales people in the United States needs to secure $36.5 million per year.

Today, it would appear that someone linked the actual sales goals and the attainment numbers for the United States market for Patch to Mr. Romenesko, and, of course, Mr. Romensko published them in his blog together with pictures from the meeting where Mr. Lenz was fired (you can see Mr. Romenesko’s blog posting here.)

Here are the sales goals and the attainments in a nice table form:

bookings

So, my $36.5 million sales target was almost spot on. At $9,038,230 as a target for the quarter, and assuming that the is baked-in growth quarter over quarter, the annual sales goal, as reflected in the leaked table, is $36.2 million. Moreover — and this should be enormously alarming to the AOL Board of Directors — the year-to-date achievement of the sales goal is seriously bad.

The firing of Mr. Lenz was clearly a mistake of the highest order and the subsequent mea culpa… eh… mea innocentia by Mr. Armstrong (read about it here) should cause some raised eyebrows in the board room of AOL.

However, it is becoming clear that, Mr. Armstrong’s odd behavior aside, the leaking is a critical problem, which has the potential for throwing Patch and AOL into a state of in extremis, and that must be dealt with immediately.

Sales goals and sales achievement numbers is extremely sensitive information, in particular in publicly traded company, and not withstanding Mr. Armstrong’s bizarre sweeping aside of the fact that AOL and Patch is evidently leaking more than the Titanic on April 15th, 1912, is something that should be dealt with decisively and immediately.

This is a corporate governance issue of the highest order. On-the-spot firing of someone that takes pictures at an internal meeting seems a little excessive and could reasonably be expected to make the Board of Directors question the judgement of the CEO of a multi-billion dollar corporation. Not taking immediate and extensive steps to finding and stopping the leaking of sales goals of and sales achievement numbers in a publicly traded, multi-billion dollar corporation is totally unacceptable and should make the Board of Directors question the judgement of such corporation’s CEO.

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Power of the Pen — ClickSoftware

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

The Prelude

In a galaxy far, far away….

Ok, not really, but a long time ago, I wrote a posting about how I — for a very brief period of time — acquired a belief that I had deux ex machina like powers because Unitek Global Services, a company that I follow, had done what I had advocated. I was yanked out of this belief when the company, almost in an act of spite, did three things that was precisely the opposite of what I, in my posting, had suggested that it should do (read the Icarus related posting here.)

Needless to say, that stings…. From omnipotent to impotent — does it get much worse?

2404826387_bf9610e6ed_oWell, regardless, I soldier on, and recently I wrote about the importance of voting in shareholder matters… something that is often not appreciated by shareholders because they feel… well … impotent.

My posting (here) was general in nature, dealing with the importance and power of voting, but it related mostly to a specific proxy voting from ClickSoftware Technologies, a company that I follow with some interest (and money!)

ClickSoftware Technologies walks a different path than most publicly traded companies and, therefore, it and its CEO, Dr. BenBassat, stirs up a lot of emotions among its shareholders. The Yahoo Finance message board for ClickSoftware Technologies, which in many ways acts as a microcosm of the overall retail investor community, has reflected these emotions and has over the last year been astonishingly critical of the company and Dr. BenBassat.

As I wrote in my posting, this year’s proxy voting offered an opportunity to radically impact upon the company through no less than four important voting items, addressing three core themes:

[I]t is interesting to note that this year’s proxy offers the discontenting shareholders a strong opportunity to impact upon their company and address at least some of their issues, being provided with (1) the opportunity to terminate a member of the Board of Directors, thereby sending a clear signal to the company’s remaining members of the Board of Directors; (2) the opportunity to deny Dr. BenBassat the options and to reject the company’s compensation plan, thereby sending a clear signal that pay for performance is the name of the game; and (3) the opportunity to split the CEO and Chairperson of the Board of Directors role, thereby reducing Dr. BenBassat’s influence and reducing the company’s dependency on him.

As I detailed in my posting, Under Israeli company law approval of each of these voting items requires a very high level of votes, and, therefore, the common shareholders could relatively easily impose their will on the company in this proxy voting.

I always vote on matters where I am entitled to a vote and I always consider my vote carefully, because the alternative, to not vote or to vote heteronomously is a form of lunacy. As I wrote in my posting:

The issue at hand, however, is bigger than that of ClickSoftware and Dr. BenBassat. The general problem is one of corporate governance and inducement to fraud.

If the shareholders do not vote — and vote intelligently, that is — insiders will increasingly solidify their control of the operational and non-operational aspects of the company and will increasingly become entitled and detached from their true responsibility: the protection of the shareholders’ interests.

Moreover, by not voting, shareholders are continuously providing the insiders with increasing degrees of two of the three components of the the fraud triangle: Rationalization and Opportunity. And once you have achieved a critical mass of rationalization and opportunity, the laws of human nature dictates that it is only a question of time before sufficient mass of the last component of the fraud triangle, Pressure, kicks in, and a crime is committed.

However, in spite of the very high threshold and in spite of the throwing around of my weight that I was doing, I did not believe that the four controversial voting items would be rejected, since, unfortunately, my experience is that retail investors are defeatists or plain ignorant when it comes to their rights and the importance of voting.

Fugue

The voting completed on July 8th, 2013, and on July 13th, 2013, ClickSoftware Technologies announced the final vote tally with a detailed breakdown of votes for, against, and abstaining (more about this below) as reflected in a 6-K filing (kudos to ClickSoftware Technologies for releasing this information, something that I will talk more about, below):

To approve the appointment of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu, as the Company’s independent registered public accounting firm for the year ending December 31, 2013 and for such additional period until the next Annual General Meeting of Shareholders, and to authorize the Board of Directors, upon recommendation of the Audit Committee, to fix the remuneration of the auditors.
For: 19,387,964 Against: 115,432 Abstain: 111,657

To approve a compensation policy for the Company’s directors and officers, in accordance with the requirements of the Israeli Companies Law.
For: 17,144,751 Against: 1,815,503 Abstain: 625,153

To re-elect Mr. Menahem Shalgi, as an “External Director” of the Company (as such term is defined in the Israeli Companies Law 5759-1999), to hold office as an External Director for a three year term and to approve his compensation as an External Director.
For: 12,987,034 Against: 5,944,973 Abstain: 653,401

To ratify and approve the appointment of Dr. Moshe BenBassat as both Chairman of the Board of Directors and Chief Executive Officer of the Company for a period of three years from the Meeting.
For: 10,815,264 Against: 8,147,150 Abstain: 622,994

To approve the grant of options to Dr. Moshe BenBassat for the purchase of 90,000 Ordinary Shares of the Company.
For: 11,672,760 Against: 7,873,657 Abstain: 38,991

In accordance with Israeli company law, this voting outcome means that all voting items were approved except for the item that would allow Dr. BenBassat to maintain the dual role of Chairperson of the Board of Directors and CEO.

With respect to the vote related to the dual role, it is not yet clear what the voting outcome actual means (go here to read more about this and the last minute wily maneuvers by the company and Dr. BenBassat.)

Update
On July 23rd, 2013, ClickSoftware Technologies announced the appointment of Dr. Israel Borovich as non-executive Chairperson of the company’s Board of Directors, ending speculation, I guess, about whether or not Dr. BenBassat would resign his co-CEO position and assume the role of Chairperson.

That Dr. BenBassat has chosen to — in principle — be under the oversight of the Board of Directors, tells us a lot about Dr. BenBassat’s view of the Board of Directors and his future plans for the company and himself.

And if there were any doubts about who is in change after the splitting of the CEO position into two co-CEO positions and the splitting of the CEO and Chairperson of the Board of Directors position, the such doubts were eradicated when the company conducted it second quarter earnings conference call on July 24th, 2013, where only Dr. BenBassat and the company’s CFO attended, while the new co-CEO, who should certainly have been on the call, and the new Chairperson of the Board of Directors who ought to have been on the call, were absent.

There are many interesting things to learn from these voting results, in particular if we bear in mind that the company has 32 million, or so, outstanding shares (I approximate… if you want to know the exact number, you can consult the SEC filings for ClickSoftware Technnologies) with the following blocks being known as of December 31st, 2012:

Shares ClickSoftware  2013

First, although only 20 million, or so (again, I approximate,) votes were cast, constituting less than two third of the common shares, this percentage of votes cast is actually very high, reflecting, I believe, a genuine interest by the common shareholders and, I am guessing, some aggressive canvassing for votes by the company and its Board of Directors members (such canvassing for supporting votes by the company and its Board of Directors members, at the company’s (and, therefore shareholders’) expense, is entirely legal, although it is probably morally and ethically questionable.)

Second, assuming that, exclusive of Dr. BenBassat and his wife’s shares, 11 million votes, or so, were locked up, then eight million, or so, retail votes were cast against Dr. BenBassat’s dual-role leadership and receipt of 90,000 options. Clearly, Dr. BenBassat’s leadership and the Board of Directors issuance of options are a lightening pole for the common shareholders.

Third, an astonishing six million, or so, votes were cast as what I believe to be a no-confidence vote for the Board of Directors members (I am assuming that Mr. Menahem Shalgi was simply singled out as the only Board of Directors member up for re-election and that he was not specifically, as an individual, perceived as being bad or good by the common shareholders.)

Fourth, it is, in fact, possible for shareholders to impact upon their investment, but far too many shareholders do not vote. If, for instance, the “missing” votes had been cast, I am guessing that each of the three surviving key voting items would have been defeated (I am assuming that of the “missing” 12 million votes approximately 10 million shares are being held by retail investors in either direct holdings, investment funds, or brokerage accounts.)

Fifth, a great number of retail investors care about what goes on at ClickSoftware Technologies and are willing to act through voting. Although 12 million, or so, of the available votes were not cast, the percentage of votes that were cast was significant (as a comparison consider that Veramark Technologies, a company with significant historical performance issues, registered only 45%, or so, votes cast in a recent proxy voting with insiders holding 25%, or so of the shares actually voted.)

On a more personal side there is one more lesson in that I clearly don’t understand the voting mechanics and voting dynamics as well as I would like to — and probably should:

  • I don’t understand how as many as half a million votes can abstain on key issues. I mean, abstaining is an active act, I would assume, so what does it mean when a voter say that he or she chooses to not vote on on critical issues (I understand, of course, that an employee may be uncomfortable voting on issues related to the CEO, but, still, I can’t be sure that this explains the high number of abstaining votes.)
  • I don’t understand how erroneous votes are accounted for. I, for one, appear to not be capable of filing out the simplest forms without making mistakes, so I assume that there must be a number of votes that are erroneous, and I wonder where these votes go.
  • I don’t understand how the personal issue votes are accounted for (as you may recall from my earlier posting (here,) votes by individuals with a “personal interest” in the voting items are not considered in the voting outcome.) So, where do these votes go and how are they accounted for? Considering, for instance, the voting items that clearly and directly relates to Dr. BenBassat (option grant and dual CEO/Chairperson of the Board of Directors,) I would expect to see shifts of at least 2.4 million votes relative to other voting issues (and, in fact, more likely shifts of four million shares, considering that Idit BenBassat, whom I assume is Dr. BenBassat’s wife and, therefore, would certainly have a personal interest,) and, yet, I can’t see these vote shifts.

My personal education aside, in summary, on the plus side for those who were discontent with the company’s performance, Dr. BenBassat and the Board of Directors received a quite audible vote or non confidence, the issuance of options to Dr. BenBassat was shown to be something that ought to stop, and the common shareholders demonstrated that they are, indeed, listening and keeping an eye on their investment. On the minus side, however, except for preventing Dr. BenBassat from having both executive and oversight control, the voting really did not achieve much and did not notably affect the Board of Directors or the company’s composition and actions.

Stretto

So, given that a lot of the retail investors did vote, perhaps I should begin to believe in the power of the pen again. Perhaps my posting did — in some imperceptible way — alter the voting record for ClickSoftware Technologies. Or perhaps it did not… I will never know unless some shareholder in ClickSoftware Technologies, upon reading this posting, actually writes to me and tells me that my posting made him or her vote in some particular way.

Also, I would be remiss if I didn’t note that the company’s posting of a precise breakdown of votes cast surprised me greatly. As I had written earlier when I discussed corporate governance:

If, for instance, we look at the proxy voting conducted in 2012, we note that there were several important measures on the ballot, including the re-election of Dr. BenBassat to the Board of Directors and the approval of a grant of 150,000 options to Dr. BenBassat — two measures that would allow the shareholders to directly deny Dr. BenBassat the disputed options and to dramatically reduce Dr. BenBassat’s influence over the Board of Directors of the company and to significantly reduce the company’s dependency on him. However, in a case of unacceptable corporate governance, all we know about the outcome of this voting voting is what the company said in its filing on July 25, 2012, where the following two lines were “crammed” into a quarterly earnings announcement:

ClickSoftware also reported that at its Annual Shareholders Meeting held on June 28, 2012, all items on the agenda as set forth in the proxy statement furnished on Form 6-K with the U.S. Securities and Exchange Commission on May 16, 2012, were approved.

This is as oblique as it is probably possible to be and leaves us with no real understanding of the shareholders sentiment. Was the option grant, for instance, approved by an overwhelming majority or by the thinnest of margins? Did the institutional holders vote?

Personally, I am mystified by something like this. Why, pray tell, would the common shareholders not automatically receive, on each and every voting item, a detailed breakdown of the number of shares cast, abstained, in favor, and against? Is there something to hide?

And, so, you may understand why I was almost knocked over when the company released a detailed accounting of the voting on the vote tally. Did Dr. BenBassat read my posting (if, so, Dr. BenBassat, please accept my greetings and my gratitude for your operational performance over the last years!) or was this just good-old-fashioned coincidence rearing its ugly head? Again, I will probably never know unless, of course, Dr. BenBassat calls me tomorrow and tells me that he was inspired by my posting.

Perhaps, after all, I do have some divine powers…

Oh, by the way, Dr. BenBassat, in case you are reading this…. It would be great if the next set of voting results were recorded and reported in a way that was more transparent. For instance, I think a per voting item accounting for the total number of votes cast, the number of erroneous votes recorded, and the number of votes not counted because of, respectively, personal interest or control issues. As you can see from the above, common shareholders like myself tend to become confused when these tabulations are omitted from the reporting.

Finally, I probably should mention that on July 8th, 2013, the day immediately after the day on which the voting finished, in an act of astonishing coincidence and timing, worthy of mention next to the remarkable timing of the publication by Colonel Joseph Schmid, Luftwaffe’s chief intelligence officer, of a comprehensive assessment of the capabilities of the Royal Air Force, on precisely the day that Adolf Hitler issued his Directive 16, the directive for invasion of England (read about this here,) ClickSoftware Technologies revised its annual guidance downwards, causing an immediate drop in the market capitalization of the company.

The details of the revision are not important for the purposes of this post (although, for the record, I hasten to say that I think it reflects an appropriate prudence by the company in assessing how potential Software as a Service (SaaS) related revenues are accounted for in guidance,) but this timing does beg the question, I think, whether the 12 million, or so, missing votes would have re-appeared if this piece of news had been released a week earlier and would have shifted the voting on the three items.

Regardless, clearly things can change, but change requires activity. As I said in my earlier posting:

Simply put, the common shareholders do have the power to enforce good corporate governance and to secure that their interests are protect, but only if they exercise their right to vote.

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Did he just say that?

General Martin E. Dempsey

General Martin E. Dempsey

In the United States the military is sancrosant, and, so, when I, in the past, have written about the apparently serious issues with perquisites, fraud, and abuse among the very highest ranks of the United States military, arguing that the the corporate governance function of the military has broken down (here, here, and here,) I have, as they say, received flak.

Well, it appears that I am not alone in this view. On June 2nd, 2013, Seth Robson of Stars and Stripes (here) reported that Army General Martin E. Dempsey, Chairman of the Joint Chiefs of Staff, has announced plans to cut back on the cost of the top brass, citing excessive numbers and excessive support:

“We got in the habit of surrounding general officers with a level of support that was probably excessive in some ways,” he said…. “What’s it going to look like if somebody sees you staying in the Ritz-Carlton … for four days and doing one hour’s worth of work?”

Well, that is, of course, a good question, and the answer is that it looks bad, and frankly, should be cause for immediate termination with loss of pension and benefits (it is, after, all tantamount to theft from the United States taxpayers.)

General Dempsey, who is of Irish American descent, is an interesting figure, having earned a Masters degree in literature on the basis of a thesis about the Irish poet William Butler Yeats (also known simply as W. B. Yeats.)

I have written about this corporate governance issue in particular with relation to General John R. Allen, General David Howell Petraeus, General Jeffrey A. Sinclair, and General William E. Ward, three of which managed to, on top of what appear to be egregious behavior by a senior employee of the Federal Government, retire with full pension. Compare that to a lowly rural letter carrier from Pasadena, Maryland, who in 2001 was convicted for stealing bank convenience checks and was sentenced to five years in prison and five years of probation. Needless to say the carrier was terminated and lost his pension.

Evidently, I am not alone in being outraged by the behavior of these four generals. Mr. Robson writes:

Last year, then-Defense Secretary Leon Panetta warned the military to keep the brass in line after expense account abuse came to light by the general formerly in charge of U.S. Africa Command, adultery by retired Gen. David Petraeus, and accusations of rape and sexual abuse by Army Brig. Gen. Jeffrey Sinclair, former deputy commander for support of the 82nd Airborne Division.

Dempsey said the behavior needs to be reined in as part of the personnel reduction and that generals and admirals will be subject to character review boards.

The personnel reduction is a reference to a long overdue reduction of the number of generals and admirals in the United States armed forces. Amazingly, there are approximately 1,000 generals and admirals, overseeing fewer than 2 million service-members. This number should be compared to the 2,000 generals and admirals that during the height of World War II oversaw 12 million service-members. Now, finally, this number is evidently going to be reduced by some 144 generals and admirals.

Good for General Dempsey. Evidently, sometimes it takes a poet to control the warriors.

Update
General James E. Cartwright

General James E. Cartwright

On June 27th, 2013, Greg Miller and Sari Horwitz of the Washington Post reported that the Justice Department is targeting General James E. Cartwright[/caption], a retired United States Marine Corps general who served who served as the Deputy Chairman of the Joint Chiefs of Staff and had previously been the head of the United States Strategic Command, in an investigation into a leak of information about Stuxnet, the covert U.S.-Israeli cyberattack on Iran’s nuclear program.

You may wonder how a United States Marine Corps General would come to know about Stuxnet, and, for the matter, why a Marine General would end up heading up the United States Strategic Command, a branch of the United States military probably best known for its primary mission: Deterring nuclear attack with a safe, secure, effective nuclear deterrent force.

If so, you probably are not be alone, since, after all, the United States Marine Corps has no nuclear capabilities and is not exactly known for subtle, covert missions.

As it happens, General Cartwright was moved into the position during the reign of Secretary of Defense Donald Rumsfeld, probably in a vintage-Rumsfeld move to stir things up at the Pentagon.

Oddly enough, at the time, the United States military’s main cyberwarfare unit was organized under the United States Strategic Command, consistent with the branch’s fourth mission: Building cyberspace capability and capacity. And, so, it would come that a General of the United States Marine Corps, an expeditionary force-in-readiness, would end up having direct knowledge of a top-secret covert operation aimed at delaying or destroying Iran’s nuclear capability.

If General Cartwright is indicted and found guilty, this will be yet another case of a failure of corporate governance in the military. If so, one can only hope that the Pentagon will at least have the common sense to take away General Cartwright’s pension and retirements benefits, so as to not cause more embarrassment for the military and have the United States tax payer pay for what is effectively another in a seemingly endless string of dishonored generals.

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Veramark is back from the grave — Who benefits and what happened?

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

…. And, if you find yourself enjoying — or otherwise benefiting from — this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.

In a recent posting (here) I wrote about the announced sale of Veramark Technologies, a North American based Telecommunications Expense Management (TEM) provider, to Varsity Acquisition LLC and All Big Ten Holdings, Inc. at a per share price of $0.98 per share.

With reference to my gain and under the heading “Financial Hijacking,” I wrote:

A gain of $13,224.15 is, of course, not shabby — particularly when we consider the time-line, but it is a far cry from what I think that my investment in the company is worth, and although the $0.98 per share price does constitute a significant premium over the market price for the VERA equity, I think that the sale of the company at this price, although probably legal, constitutes financial hijacking, a phenomenon that I wrote about in a recent posting about Click Software (here).

As I have written about in the past, my investment paradigm has many challenges, including the need for an infinite time-horizon and the ability to stand alone. The risk of financial hijacking is also a challenge — and a particularly distinct one at that, since, under the investment paradigm, a key requirement for the decision to invest in a company’s equity is that the equity is substantially undervalued, and since no one will be more keenly aware that a company is undervalued — and be in a position to capitalize on such undervaluing — than the company’s management and Board of Directors (in Forensic Fraud terminology, the company’s management and Board of Directors possess all three components of the Fraud Triangle (read more about the Fraud Triangle here): Pressure, Opportunity, and Rationalization.)

Naturally, Veramark Technologies’ management and Board of Directors have taken great care in ensuring that its process for the sale followed the customary process, including even a go-shop period, and ensuring that the offering price appear fair by framing as a significant premium to the ridiculous market price …

Today, Veramark Technologies announced in a press release that the deal has been cancelled by the company itself, who has secured another offer during the go-shop period. In the press-release the company said:

… that it has entered into a merger agreement with Hubspoke Holdings, Inc. …. and TEM Holdings, Inc. …, pursuant to which [TEM Holdings, Inc.] has agreed to offer to purchase all of the outstanding shares of Veramark Common Stock and in-the-money options for $1.18 per share …

The announcement confirms, of course, my view that the per share price of $0.98 did not reflect the value of of the company, since, in a free market economy, subsequent to the submission of a bid, the presence of another, higher bid indicates that the first bid was for less than the value of the object being sold. Moreover, the enormous difference between the per share price in the first and the second bid, $0.20, or a staggering near doubling of the premium of the first bid (the premium of the first bid, 29% over the closing price of the company’s shares on April 30, 2013, the day of the announcement of the sale to Varsity Acquisition LLC and All Big Ten Holdings, Inc., is dwarfed by the premium of the second bid, 55%.)

“Hooray,” I hear… But wait… who, exactly, is the hooray for?

Wait, who?

Who is Hubspoke Holdings, you ask. Go here to find out.

Varsity Acquisition LLC

The cancelled sale has a direct penalty, with Varsity Acquisition LLC and All Big Ten Holdings, Inc. being entitled to a $500,000 breakup fee, payable within five days.

The number of outstanding number of shares on March 31st, 2013, was 10,879,499. On May 9th, 2013, Varsity Acquisition LLC filed an SC 13D filing stating that effective as of April 30th, 2013, it held 255,023 shares (more than 2.3% of the 10,879,499 outstanding shares.)

In its filings, Varsity Acquisition LLC, furthermore, attested that “[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days,” and, so, assuming that these 255,023 was acquired at an average per share price of $0.60 (the average per share price from January 1st, 2013, through February 28th, 2013 — a period where, according to the information available from Yahoo Finance, the number of shares traded was 318,900,) then the expenditure amounted to $153,014.

Between the announcement of the first sale, on April 30th, 2013, and the announcement today, June 17th, 2013, of the second sale, 1,608,700 shares have been traded at an average per share price of $0.97, for a total transaction value of $1,560,439. Over the last two days, the number of shares traded has been zero.

If we make a broad assumption that the entire volume traded between April 30th, 2013, and today constituted purchases by Varsity Acquisition LLC and we make an assumption that Varsity Acquisition LLC’s expenses in relation to the sale were $250,000 or less, then today’s announcement by Veramark Technologies yields net gain of almost $750,000 (computed as the break-up fee plus the assumed profit on the acquired shares (ignoring, of course, transaction costs) less the estimated expenses.)

For a quite modest deployment of capital over a relatively short period, that is arguably a handsome return.

Note, that the broad assumption about the volume is just that… an assumption. However, as an assumption goes, this is, I think, a pretty good one.

The insiders

In a recent 8-K filing, Veramark Technologies wrote:

Prior to Varsity being obligated to launch the tender offer after the go-shop period, certain officers and directors of the Company holding, beneficially or of record, approximately 787,905 shares of Company Common Stock in the aggregate, which represents approximately 7.1% of the shares of Company Common Stock presently issued and outstanding, will enter into Tender and Voting Agreements ….

Assuming that these 787,905 shares constitutes the shares held by the insiders, then with today’s announcement the insiders, as a group, realized an additional $157,581 in profit on the sale of the company when the second buyer stepped in.

This, however, is probably only a partial amount since the shares in questions are those that can be voted, most likely excluding non-exercised options. From the DEF14-A filed on April 4th, 2012, we can quantify the total number of shares for Board of Directors members and the Executive Officers as being at least 1,025,675, with 461,000 shares of these shares being common stock these members and executives have the right to acquire pursuant to options issued under the company’s incentive plan, and 297,667 shares of restricted common stock issued to named executives. And, so, the insiders, as a group, might actually have realized an additional $205,135 or more in profit on the sale of the company when the second buyer stepped in

In a related 8-K filing, the company announced that it, on April 30th, 2013, had entered into:

… Change in Control Bonus Agreements (the “CIC Bonus Agreements”) with certain of its executive officers, including: Anthony C. Mazzullo, President and Chief Executive Officer, Ronald C. Lundy, Senior Vice President of Finance and Chief Financial Officer, Joshua B. Bouk, Senior Vice President of Strategic Services, and Thomas W. McAlees, Senior Vice President of Engineering and Operations.

Each of the CIC Bonus Agreements is effective from April 30, 2013 until the earlier of a Change in Control, as such term is defined in the CIC Bonus Agreements, or December 31, 2013. Each CIC Bonus Agreement provides that, subject to the continued employment of the executive with the Company through the occurrence of a Change in Control, the Company will pay such executive a lump sum cash payment within five days following the Change in Control, as follows: Mr. Mazzullo – $40,000; Mr. Lundy – $20,000; Mr. Bouk – $20,000; and Mr. McAlees – $25,000.

In aggregate, therefore, this change of control bonus agreement provides for earnings of $105,000 to the insiders, and, accordingly, with the new sale, the insiders, as a group, appear to have netted at least an additional $310,135. Not a bad return for what I would think is really very little work — in particular if the executives get to keep their jobs and perhaps even get a new set of incentive options.

The common shareholder

Some common shareholders will benefit from the $0.20 increase in the per share price, but shareholders holding the estimated 1,608,700 million shares that we assume went to Varsity Acquisition LLC between April 30th, 2013, and today certainly will not.

I am one of these shareholders, and the net impact to me is a shadow loss of $8,365 on 41,825 shares.

As I wrote in my previous posting, I understand that there is the risk of selling of early, rather than waiting for the dust to settle:

Generally, although in these situations there might be a crime hidden in all the smoke and mirrors and tenacious litigation may be able to flush such crime out and although it is possible that the first offer will be replaced by a later, better offer, it is my experience that the best thing to do is to capture whatever gain one can and move on to other pastures as quickly as possible. Therefore, I take my $0.95 per share, rather than waiting for the $0.98 that I may be able to collect over the next month — or even a hypothetical higher bid.

The fact that I understand that there is this risk, however, does not mean that I do not feel irritated by what went down here. As I wrote in the above, it was very clear to me that Veramark Technologies is worth far more than the $0.98 per share that was offered in the first sale (and, in fact, is worth more than the $1.18 that is now offered,) and, so, the fact that I do not achieve a higher return than I did (whether is was an additional $8,365 or and additional $63,574, reflecting the $2.50 per share price that I think the company is worth) is, in my view, the fault of the Board of Directors, who did not do a good enough job at, from the outset, getting the best purchase price from the outset (and, therefore, are incompetent and not qualified to be members of a Board of Directors.)

With respect to the executives they can to a certain extent be excused because they, apparently, were not subject to sufficient oversight by the Board of Directors. In spite of the the fact that I think that the Board of Directors are at fault, however, does not completely relieve the executives of the management team of responsibility, since, for sure, they have significant ability to influence decisions. Moreover, in this specific case, the executives may, I think, have gotten confused about whose interests they were expected to primarily protect — their own or that of the shareholders.

Irritation aside, my notion of this kind of thing is that, as a shareholder and co-owner, the one thing that one could — and should — do is to make a note of the executives and the Board of Directors members for future references.

So, for the purpose of common shareholders’ evaluation of future performance by management teams, here are the Executive Officers of Veramark Technologies: Mr. Anthony C. Mazzullo, President and CEO; Mr. Ronald C. Lundy, Senior Vice President and CFO; Mr. Joshua B. Bouk, Senior Vice President; and Mr. Thomas W. McAlees, Senior Vice President.

And here are the Board of Directors members of Veramark Technologies: Mr. Ronald J. Casciano, Mr. Seth J. Collins, Mr. Charles A. Constantino, Mr. John E. Gould, Mr. Anthony C. Mazzullo, and Mr. Steve M. Dubnik

Was there a leak?

With the revelation coming out of the prosecution of the Magellan fund and employees of SAC (read more about this here,) it is becoming more and more clear that the financial industry is driven to a substantial degree by insider tipping and insider trading.

I was reminded of this fact, when I read the previously discussed disclosure by Varsity Acquisition LLC, that:

[n]either Varsity nor the persons set forth on Schedule A [the principals of Varsity Acquisitions] has had any transactions in the Shares within the past 60 days

In my earlier posting I had referenced a substantial activities in the days before April 30th, 2013:

The second, much more acute opportunity came this week, when I discovered that there was a massive Bid position in VERA, at 500,000 shares for $0.70 per share, with a corresponding massive Ask position, at 100,000 shares at $0.75 per share. This, of course, was a clear indication of what was to come.

I had originally assumed that the bid for 500,000 shares was some sort of preemptive buy by Varsity Acquisition LLC, but in view of the disclosure, this appear to not be the case, which raises the question of who put in this massive order in the days before April 30th, 2013, and why they did so immediately before the announcement the acquisition. This question becomes even more pertinent if we review the trading in the 60 days before April 30th, 2013:

(c) Per Jacobsen, 2013. All rights reserved

(c) Per Jacobsen, 2013. All rights reserved

The 70,000, or so, shares traded during the 5 trading days before May 1st, 2013, which were traded at a price of around $0.75 (I paint with a broad brush here,) in themselves would give rise to a profit of $30 thousand, or so, and, of course, a remarkable stroke of luck in timing — easily the envy of lucky Stevie Cohen, I think.

Participate, please….

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Question of the week — Busyness in business

5817572653_f9dcd7d745_oSo evidently, according to Daniel Gross, on the Daily Beast (here,):

[a]bout 66 minutes into Facebook’s annual shareholder meeting earlier this week, a stockowner stood up and posed a question to Ms. Sheryl Sandberg, the company’s long-serving chief operating officer who this spring penned a best-selling book, Lean In, and then created a nonprofit group, Leanin.org to promote women in the workplace.

“You wrote a great book in the last year, spent a lot of time promoting it, traveling around. I’m sure it did a lot of positive things for Facebook’s ability to attract people.” He said. “However, my concern is that took a lot of time and activity in addition to your substantial responsibilities as COO of Facebook. How can you assure me that you’ll be just as committed to Facebook over the next 12 months as you were the previous four or five years? …”

The question clearly qualifies for at least honorable mention as question of the week, and it should resonate with most shareholders in larger North American companies where a member of the executive leadership group, who — in return for huge compensation, perquisites that would make Louis XIV of France, le Roi-Soleil, envious, and a level of job security that is unparalleled by any offered by any social security system across the globe — are expected to (and I paraphrase the standard language from executive employment agreements) during his or employment devote his or her full business time and attention to the performance of services for the company.

Ms. Sandberg, who received an obscene $26,216,173 in compensation in 2012 and $30,957,954 in 2011 (I ignore the perquisites, which, I am sure, are not inconsiderable) while the company that she was expected to help operate saw its per share price drop from $38 to $23, or so (with interim drops even leading to per share prices being less than $20,) has become somewhat of a poster-girl for the “serious business” side of Facebook, but, certainly, it is hard to see how this has manifested itself in improved performance, and is hard to see how the position as the COO of a company with a market capitalization in excess of $60 billion is compatible with her many other activities, such as book writing, personal interviews, creation of a non-profit group, and Board of Directors membership in the Walt Disney Company and Starbucks Corporation.

Certainly, I would think that Facebook’s shareholders would be entitled to wonder if prohibiting Ms. Sandberg from these activities would increase her focus on the company’s performance.

Personally, I believe that, if you pay for someone’s time, you can reasonably expect them to dedicate their time and focus to your issues, and if they don’t, then, frankly, I think you should fire them — immediately.

There is another, related problem here. While executive leaders carry their busyness around as a badge of honor (in business if you are not constantly busy, you apparently are doing something wrong,) they also appear to have loads of extra time to write books, go on media tours, compete in sailing events, and travel the world for leisure. So, what is it? Are you a busy business person or do you have all sort of leisure time to pursue extracurricular activities?

Mr. Jack Welch, the former CEO of General Electric, is another example of the busyness obsessed business person. While always promoting the busy business person story, he somehow found time to travel the world, take naps in his office, divorce and remarry (repeatedly) — probably one of the most distracting and time-consuming things a human being can do, and write a comprehensive biography and management philosophy book. But then Mr. Welch was always an enigma, stating, for instance, that “[o]n the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products” while at the same time reducing General Electric’s workforce from 411 thousand employees in 1980 to 299 thousand in 1985, while aggressively replacing real, tangible businesses that produces real, valuable products for the stakeholders with the monster that would become GE Finance.

And, of course, the problem is not isolated to private industry. General John R. Allen, for instance, had time to correspond extensively with Ms. Jill Kelley about god-only-knows what while allegedly aggressively prosecuting two wars (something I wrote about here). At the same time, his superior officer, General David Howell Petraeus, who was, I guess, also expected to prosecute the two wars with full vigor, found time to wine, dine, and otherwise impress Ms. Paula Broadwell in locations around the globe and write a book (something I wrote about here.)

So, in the interest of corporate governance, I tip my hat to the civilian that stood up at the Facebook annual meeting and asked the question that should be on every stakeholder’s mind: Should you not be minding the shop instead of running around having a good time?

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Pushing that button….. — The bigger picture of the 2013 ClickSoftware proxy

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

In a previous posting (here,) I wrote about what it, in my opinion, means to be an excellent investor, arguing that being an excellent investors is about being engaged in your investment:

… [B]eing an excellent investor includes more than just allocating money. In its simplest and most direct form it includes voting on proxy matters, including, yes, the firing of members of the Board of Directors (much the same way you would fire your attorney or an employee if you found that he or she did not adequately represent your interest,) …

I touched upon the issue of proxy voting in another posting where I dealt with the subject of how to be a bad investor. In the posting I wrote:

Most investors, by far, including investors with sizable portfolios and institutional investors, are completely passive with their investment, taking no action whatsoever to ensure that their investment in a company is protected except perhaps to pray at night before they turn out the lights.

Yes, institutional investors are, indeed, for the most part passive (I paint with a broad stroke brush here and, of course, exclude the so-called investor activist,) and, yes, in most cases they don’t have a firm idea of what a company that they have invested in is actually doing.

This passivity, which, for reasons that should be obvious, is silly to the extreme, manifests itself consistently throughout the retail shareholder community with even the simplest action of all, to vote in annual proxy events, not being exercised or being exercised haphazzardly. This is puzzling to me since the proxy is the sole vehicle available to shareholders for directly and forcefully impacting upon the company’s decision through voting on issues and determining who gets to manage the company that they have invested in.

I encounter many reasons or excuses for this passivity, but most of them are not valid, and I believe that the real reason why most shareholders are passive with their investments is that they have adopted a view that investments are like lotteries where the most important decision is when to buy in.

Needless to say, investments should not be treated like the lottery. Perhaps trading and speculation, two sides of the same coin, should be, but investment should not be.

5189335153_5184f1e809_oShareholders are owners, but they are a special class of owners in that, ceteris paribus, they can only exercise their ownership through an elected proxy, the Board of Directors, and through a voting process that is infrequent and largely does not involve any real operational issues (for the purposes of this posting, I ignore preemptive rights and other exotic rights that shareholders might have, including the rights to sue under the securities laws.)

Unfortunately, the Board of Directors, which is elected through an infrequent voting process, frequently for a period of service of three years, is in reality often simply a proxy for — or a puppet of — the company’s management team in general and the company’s CEO in particular, and does not truly represent the individual shareholders. Moreover, the process for nominating or recalling a member of the Board of Directors, which, in the interest of corporate governance, should be straightforward and transparent — and certainly should not be controlled by the the Board of Directors, the management team, or the CEO — is effectively constructed in such a way as to secure status quo.

Likewise, the voting process in general, which is mostly available only as part of an annual meeting, is constructed in such a way as to make it difficult for shareholders to influence the company’s management or operations, including, for instance, elaborate processes making it hard for shareholders to raise issues for voting by the shareholders and the effective enabling a company’s Board of Directors, management team, and CEO to exercise far more influence than can the shareholder raising an issue for voting.

As described in a recent study (here) by Lee Harris, an Associate Professor of Law at the University of Memphis Law School. and a J.D. from Yale Law School (with slight reformatting by me) the deck is stacked:

… [S]hareholder-initiated proposals are subject to exclusionary rules that give the board of directors the ability to leave many proposals out of the firm’s proxy statement.

Among other reasons, the board of directors can exclude proposals from the proxy statement if the proposal sponsor fails to strictly adhere to securities regulations, if the proposal violates state law, or, importantly, if the proposal concerns a director election.

Because of this last exclusion, shareholders who want to nominate a candidate for the board of directors cannot use a shareholder proposal as a method of nominating their preferred candidate. Second, binding proposals can be excluded, so the vast majority of proposals are merely recommendations to the incumbent board. If shareholder proposals make it through the thicket of exclusionary rules and into the proxy statement, shareholders have only 500 words to convince other shareholders to vote for each proposal.

Ironically, however, the most importance corporate governance inhibitor is not the hindrances arguably built into the corporate bylaws and applicable corporation laws in order to prevent free and open election of Board of Directors members and free and open voting on issues important to the shareholders. Rather it is the near complete lack of voting or the unintelligent voting by the shareholders that are not insiders, not large institutional holders, and not investor activists.

ClickSoftware

It has never been clear to me why shareholders, who have very few ways to directly impact upon the management of the company that they own, would not exercise their right to vote or would do so in a haphazard manner. Given that there normally is only one opportunity to vote per year and that votes have what is effectively near perpetual effect (typically Board of Directors members are elected for three years,) it would appear obvious that (1) shareholders should vote and (2) that shareholders should vote with exceptional forethought. And yet most shareholders don’t…..

I was reminded of this fact recently, when ClickSoftware issued its yearly proxy, containing five items that should be voted upon:

  1. The approval of the appointment of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu, as the company’s independent registered public accounting firm.
  2. The approval of a compensation policy for the company’s directors and officers.
  3. The re-election of Mr. Menahem Shalgi, as a member of the Board of Directors to hold office for three years.
  4. The approval of the appointment of Dr. BenBassat as both Chairperson of the Board of Directors and CEO for a period of three years.
  5. The approval of the grant of options to Dr. BenBassat for the purchase of 90,000 shares of the company.

As I have written about before (here,) ClickSoftware is an Israeli based software company traded on Nasdaq under the ticker symbol CKSW. It has annual revenues is excess of $100 million and strong competitive advantages and is an interesting and intrinsically very valuable company with the potential to greatly grow over the next years, and, generally, I approve greatly of how the company’s management team and Board of Directors moves forward with a long term outlook, rather than a quarter-by-quarter outlook — even when the market disagrees and quarter-after-quarter assigns CKSW a low per share price.

That being said, I do have issues with the approach of ClickSoftware’s management team and Board of Directors on certain issues, primarily when it comes to the company’s issuance of excessive amount of incentive equity to the company employees and the the continued issuance of incentive equity to the company’s CEO. As I wrote in a previous posting:

Year after year, the company has experienced an aggressive dilution rate because of its regular grant of incentive equity to its staff. This dilution is particularly problematic because of the fact that the per share price of CKSW effectively has moved very little since the company’s IPO in June of 2000 — where the company’s equity was priced at $7 per share — in spite of an enormous growth in annual revenues and one of the strongest balance sheets around ….

The sting of this dilution, which I consider almost completely unnecessary given the company’s current revenue level, projections for growth, stability, and excellent compensation (at this stage, the company is hardly extending options as sweat equity or to compensate for any risk,) is aggravated by the company’s consistent issuance of incentive equity to Dr. BenBassat, at a level that effectively has kept him immune from the dilution that he, as the company’s CEO, is the prime mover behind.

My disagreement with the company’s management team and the Board of Directors on these points, however, pales next to the expressions of discontent voiced by shareholders on the Yahoo Finance message board for ClickSoftware (I assume they are shareholders, but, for the record, I don’t really know this to be factually correct and I am open to the possibility that they are simply agitators of some sort.)

Many of these expressions of discontent are based on pure ignorance, many are silly, and some border on defamation of character, but nevertheless it is clear that there is widespread discontent with the share price (and, accordingly, with the performance of the company’s management, Board of Directors, and CEO,) the regular option grants to Dr. BenBassat, and the entrenched nature of the management team, and — oddly — with the age of Dr. BenBassat who is in his mid-sixties.

In light of this discontent — whether or not one agrees with it — it is interesting to note that this year’s proxy offers the discontenting shareholders a strong opportunity to impact upon their company and address at least some of their issues, being provided with (1) the opportunity to terminate a member of the Board of Directors, thereby sending a clear signal to the company’s remaining members of the Board of Directors; (2) the opportunity to deny Dr. BenBassat the options and to reject the company’s compensation plan, thereby sending a clear signal that pay for performance is the name of the game; and (3) the opportunity to split the CEO and Chairperson of the Board of Directors role, thereby reducing Dr. BenBassat’s influence and reducing the company’s dependency on him.

On a side-note, it is interesting that there appears to be very little debate about the election of an auditor (arguably, as we learned from the WorldCom and Enron debacle (and as I saw lately with Unitek Global Services (read about it here), one of the most important decisions in a corporation’s life-cycle, and, so, I would expect the choice of an auditor to be a highly controversial issue) or the proposed compensation plan (which, for reasons that I will not get into here, is a document that is byzantine and obscure-by-design and that sends all the wrong signals to all stakeholders in the company and ought to be struck down before it seriously harms the company.)

If the commentary on the Yahoo Finance message board is indicative of anything, this opportunity is not fully understood by the shareholders of ClickSoftware. Here are two comments from the last weeks that should give the reader a sense of what we are dealing with:

“I will vote against all three proposals. Unfortunately so many investors, especially institutional investors, simply “rubber-stamp” proxies [sic] the chance of derailing these three corrosive ideas is slim.”

“If institutional owners do not get want to get rid of him, we will be stuck with him until he wants to leave.”

Let’s look at the proxy resolutions up for vote and see what could really be done….

The voting process

Although, for sure, the true proxy power lies with the Board of Directors, common shareholders are not without proxy influence and voting validation power. As the company writes in its proxy:

To the extent you would like to state your position with respect to any of proposals described in this proxy statement, in addition to any right you may have under applicable law, pursuant to regulations under the Israeli Companies Law 5759 – 1999 (the “Companies Law”), you may do so by delivery of a notice to the Company’s offices located at 94 Em-Hamoshavot Road, Petach Tikva 49527 Israel, not later than June 10, 2013. Our Board of Directors may respond to your notice.

Following the Meeting, one or more shareholders holding, at the Record Date, at least five percent (5%) of the total voting rights of the Company, which are not held by Controlling Shareholders (as defined hereunder) of the Company, may review the Proxy Cards submitted to the Company at the Company’s offices during business hours.

The first right is essential and allows the shareholders to, among other things, bring any discontent to the attention of the institutional shareholders, with a significant potential for impacting upon the voting results.

The second right is critical, not just as a validation of the legality of the voting process, but also because it provides an insight into what way the company’s common shareholders are truly leaning on the issues at hand.

If, for instance, we look at the proxy voting conducted in 2012, we note that there were several important measures on the ballot, including the re-election of Dr. BenBassat to the Board of Directors and the approval of a grant of 150,000 options to Dr. BenBassat — two measures that would allow the shareholders to directly deny Dr. BenBassat the disputed options and to dramatically reduce Dr. BenBassat’s influence over the Board of Directors of the company and to significantly reduce the company’s dependency on him. However, in a case of unacceptable corporate governance, all we know about the outcome of this voting voting is what the company said in its filing on July 25, 2012, where the following two lines were “crammed” into a quarterly earnings announcement:

ClickSoftware also reported that at its Annual Shareholders Meeting held on June 28, 2012, all items on the agenda as set forth in the proxy statement furnished on Form 6-K with the U.S. Securities and Exchange Commission on May 16, 2012, were approved.

This is as oblique as it is probably possible to be and leaves us with no real understanding of the shareholders sentiment. Was the option grant, for instance, approved by an overwhelming majority or by the thinnest of margins? Did the institutional holders vote?

Personally, I am mystified by something like this. Why, pray tell, would the common shareholders not automatically receive, on each and every voting item, a detailed breakdown of the number of shares cast, abstained, in favor, and against? Is there something to hide?

With respect to the mechanics of the voting, the company clearly lays out the voting rules in the proxy:

…[A] “broker non-vote” occurs on an item when a broker identified as the record holder of shares is not permitted by applicable rules, to vote on that item without instruction from the beneficial owner of the shares and no instruction has been received. For instance, the election of directors is not a “routine” matter for purposes of broker voting. If a shareholder does not instruct the broker how to vote with respect to such item, the broker may not vote with respect to this proposal and those votes will be counted as “broker non-votes.”

The matters described in Proposals 3 to 6 [items 2 through 5 in the list above] are not “routine” matters, and therefore, if a beneficial shareholder does not instruct the broker how to vote with respect to these items, the broker may not vote with respect to these proposals and those votes will be counted as “broker non-votes.”

It should be noted that it is the intention of the persons appointed as proxies in the accompanying proxy to vote “FOR” the other items on the agenda unless specifically instructed to the contrary, or unless they may be determined not to be “routine” matters, in which case, a broker may not vote on such matters without instructions from the shareholder.

Abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum for the transaction of business, but such abstentions and broker non-votes will not be counted for purposes of determining the number of votes cast with respect to the particular proposal.

The affirmative vote of at least a majority of the votes of shareholders present and voting at the Meeting in person or by proxy is required to constitute approval of Proposal 2 [item 1 in the list above.] Proposals 3, 4, 5 and 6 [items 2 through 5 in the list above] are special resolutions which require the affirmative vote of a majority of the shares present, in person or by proxy, and voting on the matter, provided that either (i) at least a majority (and in respect of Proposal 5 [item 4 in the list above,] two thirds) of the voted shares of shareholders who are not Controlling Shareholders and who do not have a personal interest in the resolution are voted in favor of the resolution; or (ii) the total number of shares of shareholders, who are not Controlling Shareholders and who do not have a personal interest in the resolution, voted against the resolution does not exceed two percent (2%) of the outstanding voting power in the Company.

Here is a table with the number of shares held by shareholders holding more than 5% of the company’s outstanding shares and held by its Board of Directors members and executive officers.

Shares ClickSoftware  2013

Firing a member of the Board of Directors

As mentioned above, some shareholders appear to be concerned about whether the Dr. BenBassat is the right man to lead the company over the coming years, arguing in most cases that running a technology company requires attributes that are rare in an older person.

If the argument that youth beats experience is valid (see here for an example of this -not being true,) then surely a similar argument could be made about Mr. Shalgi, the member of Board of Directors who is up for re-election and who is 62 years old.

Moreover, if the performance of the Board of Directors has been unacceptable, then, surely, firing the members of the Board of Directors is an appropriate thing to do — particularly someone like Mr. Shalgi who appear to not have had an operating job since 2003 (that’s before mobile applications, development of which is a key part of ClickSoftware’s growth strategy, were even thought of,) and since he is part of the Compensation Committee, which recommended — and, I guess, recommend — the award of options to Dr. BenBassat.

To fire Mr. Shalgi is not difficult, it would seem. As the company writes in its proxy:

Under the Israeli Companies Law, the election of the nominee for external director requires the affirmative vote of a majority of ordinary shares present and voting at the Meeting, in person or by proxy, entitled to vote and voting on the matter, provided that either: (i) at least a majority of the shares of shareholders who are not Controlling Shareholders and who do not have a personal interest in the resolution are voted in favor of the election of the external director; or (ii) the total number of the shares of shareholders who are not Controlling Shareholders and who do not have a personal interest in the resolution voted against the election of the external director does not exceed two percent (2%) of the outstanding voting power in the Company.

Given that this is not a routine matter, a simple majority of the voted shares — exclusive of broker votes — are needed to re-elect Mr. Shalgi, and Mr. Shalgi’s own shares cannot be counted as he, arguably, has a personal interest.

Assuming that Mr. Shalgi can get the support and votes of the entire management team, the Board of Directors, and Mr. BenBassat and his wife, he will still be 30%, or so, short of the required 50% if all shareholders vote. In fact, even if he can secure the support and votes of the three largest institutional holders, he will still be 5%, or so, short, if, and only if, all shareholders vote.

And, therein lies the rub. The issue is not the institutional shareholders can be enlisted by the Board of Directors (they can, of course — thinking that they cannot and will not is just plain silly,) but, rather, whether all the common shareholders vote.

Moreover, if just one of the largest institutional holders decides that they don’t like Mr. Shalgi, the situation can quickly turn ugly, which, of course, should make any smaller shareholder wonder what kind of incentives might — hypothetically, of course — be provided to ensure that such a situation does not arise.

Stopping the issuance of options

To stop Dr. BenBassat from getting more options is actually easier than firing Mr. Shalgi. While the resolution to approve the grant of 90,000 options to the Dr. BenBassat is also not a routine matter, and therefore requires a simple majority of the voted shares, exclusive of broker votes, significantly, Dr. BenBassat and his wife’s shares can supposedly not be counted as votes since Dr. BenBassat has a personal interest.

The fact that, as far as I understand it, Dr. BenBassat’s voting shares and the voting shares of his wife — a total of 12.1%, or so, of all the outstanding shares — are eliminated from consideration, significantly increases the burden on Dr. BenBassat. Again, if all shareholders vote, it will be non-trivial for Dr. BenBassat to secure the needed majority to lock in the option grant.

Dismantling the power base

For his critics, the big opportunity to reduce Dr. BenBassats influence came about last year, when Dr. BenBassat ran for reelection as a members of the Board of Directors. Had he failed to achieve the simple majority of the voted shares, his role would, I guess, have been reduced to that of a CEO, reporting to the Board of Directors.

This year Dr. BenBassat’s critics gets a second chance, when they are afforded the opportunity to vote against Dr. BenBassat having a combined role of CEO and Chairperson of the Board of Directors. And believe it or not, achieving a split of these two roles is actually easier than preventing Dr. BenBassat from getting the 90,000 options.

As the company writes in the proxy:

Under the Israeli Companies Law, the approval of this resolution requires the affirmative vote of a majority of ordinary shares present and voting at the Meeting, in person or by proxy, entitled to vote and voting on the matter, provided that either: (i) at least two thirds (⅔) of the shares of shareholders who are not Controlling Shareholders and who do not have a Personal Interest in the resolution are voted in favor of the election of the resolution; or (ii) the total number of the shares of shareholders who are not Controlling Shareholders and who do not have a personal interest in the resolution voted against the resolution does not exceed two percent (2%) of the outstanding voting power in the Company.

So, in this case, not only can Dr. BenBassat and his wife’s shares supposedly not be counted as votes since Dr. BenBassat has a personal interest, but Dr. BenBassat is also faced with the prospect of having to achieve two thirds majority. This is a very high bar and even very shareholder friendly and popular CEOs can have difficulties achieving the required majority (for instance, Monica Iancu, the CEO of MIND CTI — a CEO quite popular among the company’s shareholders — recently failed to secure the required two thirds majority, and, accordingly, had to relinquish the role as Chairperson of the Board of Directors.)

Again, if all shareholders vote, it will be non-trivial for Dr. BenBassat to secure the needed majority to retain the combined role of CEO and Chairperson of the Board of Directors. With 32 million shares outstanding, of which four million shares controlled by Dr. BenBassat do not count, leaving 28 million shares, the resolution would require 21 million affirmative votes — a tall order by any measure.

So what does it mean?

I am not in agreement with the notion that Dr. BenBassat is not suited to be ClickSoftware’s CEO. However, I am in disagreement with the company’s management team’s and the Board of Directors apparently indiscriminate granting of options to Dr. BenBassat and to the company’s employees, and I am most certainly not in favor of the Escherian and unfair compensation plan that has been laid out for the shareholders approval. And, so, I will vote appropriately.

The issue at hand, however, is bigger than that of ClickSoftware and Dr. BenBassat. The general problem is one of corporate governance and inducement to fraud.

If the shareholders do not vote — and vote intelligently, that is — insiders will increasingly solidify their control of the operational and non-operational aspects of the company and will increasingly become entitled and detached from their true responsibility: the protection of the shareholders’ interests.

Moreover, by not voting, shareholders are continuously providing the insiders with increasing degrees of two of the three components of the the fraud triangle: Rationalization and Opportunity. And once you have achieved a critical mass of rationalization and opportunity, the laws of human nature dictates that it is only a question of time before sufficient mass of the last component of the fraud triangle, Pressure, kicks in, and a crime is committed.

Frankly, I find it hard to write about shareholder voting because not voting — or voting heteronomously should never really be an option.

Simply put, the common shareholders do have the power to enforce good corporate governance and to secure that their interests are protect, but only if they exercise their right to vote.

Donations, please….

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Incentive stock grants — Not what you may think

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

8d20979vI hold an investment in ClickSoftware, an Israeli based software company traded on Nasdaq under the ticker symbol CKSW.

ClickSoftware, with annual revenues is excess of $100 million and strong competitive advantages, is an interesting and intrinsically very valuable company with the potential to greatly grow over the next years.

Overall, I quite like what the company does and how its management team and Board of Directors moves forward with a long term outlook, rather than a quarter-by-quarter outlook — even when the market disagrees and quarter-after-quarter assigns CKSW a low per share price.

There are, however, areas where I disagree with the approach of ClickSoftware’s management team and Board of Directors. Two of these areas are the issuance of excessive amount of incentive equity to the company employees and the the issuance of incentive equity to the company’s CEO, Dr. BenBassat, in the form of options grants of CKSW stock.

Year after year, the company has experienced an aggressive dilution rate because of its regular grant of incentive equity to its staff. This dilution is particularly problematic because of the fact that the per share price of CKSW effectively has moved very little since the company’s IPO in June of 2000 — where the company’s equity was priced at $7 per share — in spite of an enormous growth in annual revenues and one of the strongest balance sheets around.

Although the per share price has from time to time gone higher than its current level and although the company has paid out a small (but consistent) dividend since 2011 and in spite of the company’s acquisition of three small companies for cash, it is my opinion that the performance of the company’s per share price over the years since the IPO is unacceptable and is adversely affected by a mostly unnecessary annual dilution of the common shareholders.

The sting of this dilution, which I consider almost completely unnecessary given the company’s current revenue level, projections for growth, stability, and excellent compensation (at this stage, the company is hardly extending options as sweat equity or to compensate for any risk,) is aggravated by the company’s consistent issuance of incentive equity to Dr. BenBassat, at a level that effectively has kept him immune from the dilution that he, as the company’s CEO, is the prime mover behind. Naturally, no such dilution offset has been offered to the common shareholders.

I wrote about the direct impact of this issuance of equity incentives to Dr. BenBassat (dilution) and the indirect impact (increased risk of financial hijacking) in a previous post (here,) saying that:

[T]he company’s Chief Executive Officer and other parts of the company’s management team control approximately 20% of the outstanding shares, a significant number of options are outstanding at an exercise price vastly below the current per share price of $8, or so, and the company continues to issue stock based compensation at a high pace in spite of the fact that the company’s net performance, measured in earnings per share, has deteriorated over the last years.

There are, of course, other forms of financial hijacking, including consistent issuance of diluting incentive equity to senior employees who does not need it. For ClickSoftware, for instance, Mr. BenBassat — in one form or another — controls close to four million shares, amounting to 12%, or so, of the total number of outstanding shares, and, yet, the company’s Board of Directors, lead by Dr. BenBassat, insists on issuing more than 100,000 options on an annual basis to … you guessed it… Dr. BenBassat.

Should the company be sold at some point in the future at a per share price of $15, Dr. BenBassat’s shares (or, rather, shares controlled by Dr. BenBassat) will be worth a staggering $60 million. On this scale of compensation, I, for one, do not see how the addition of 100,000 options annually really increases Mr. BenBassat’s incentive to achieve such outcome.

Generally, I am subject to a lot of criticism when I point out that incentive equity is not the panacea that is it made out to be in the business and investment writings — particularly when it comes to stable companies with limited risk and well-compensated staff, and, in fact, can be contrary to the interest of the common shareholders. The idea that incentive equity — in particular when issued to CEOs — is a necessity and an absolute good is as ingrained in the common business and investor culture as is the notion that growth companies should not pay dividends (a ridiculous and inherently value-destabilizing notion that was most recently repeated by Warren Buffett,) and any attempt to counter this notion has traditionally let to ostracizing.

I was, therefore, pleasantly surprised when I read a recent working paper from some pretty smart fellows at University of Cambridge, University of Utah, and Purdue University (you can find it here,) which concluded that there was evidence that (I hope you are sitting down for this one, dear reader):

… CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of
excess pay earn negative abnormal returns over the next three years of approximately -8%.

The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.

Whoaaa!!!!! Let me translate: Higher incentive pay leads to lower performance.

The study (hat off to a Yahoo Finance message board poster, vo2macs, who pointed my attention to the study,) which has a basis of 1,500 companies (largely the S&P1500 firms) over the period from 1994 to 2011 period, is complex, but the gist of it is that there is a problem with incentive equity in that it stimulates overconfidence. While incentive equity do work as an incentive, it also attract individuals that are willing to take too much risk with the company’s money.

This may be a surprise to most readers, but it is quite in line with the fickle nature of incentives as described in a recent article by Dr. Barry Schwartz, a Professor of Psychology at Swarthmore College (you can find it here, courtesy of LinkedIn) who in his article concludes:

Thinking of “smart” incentives as magic bullets is virtually guaranteed to demoralize activities, and practitioners, and eventually, whole practices. Incentives are meant to be a substitute for having people who do the right thing because it’s the right thing. They aren’t.

The finding of the working paper is consistent with my issue with the regular issuance of incentive equity to Dr. BenBassat. First, the study establishes that there is no proof that such issuance promotes performance (au contraire, it appears that it impedes performance,) and, second, it implies that there are significant risks associated with constantly increasing the size of the ownership position held by Dr. BenBassat at the expense of the common shareholder — something that is intuitive, but nevertheless constantly disputed by business and investment demagogues.

It is nice to be vindicated — in particular when you find yourself exiled.

For the record, other substantial investors in ClickSoftware has, I believe, argued pretty consistently against the number of options issued to Dr. BenBassat by the Board of Directors, albeit with a different twist.

In particular a long term investor located in the Pacific West has argued for years that the issuance of share options to Dr. Benbassat has no real incentive value, and, in fact, acts as a demotivating force on the rest of the ClickSoftware Staff, because it creates, and a I paraphrase, two different classes of employees within the company. This investor has also argued that rather than just not issuing these options to Dr. BenBassat, the options should be reallocated to other ClickSoftware staff.

I understand the first point, but I don’t agree with the derived, second point for the reasons that I highlighted above and has written about in the past: (1) At this point in ClickSoftware’s life-cycle when the company is mature, growing, stable, and profitable and the company is compensating its staff at the market level or better there are no pay-equivalency or risk reasons to provide a large number of incentive options to the staff, (2) the level of incentive equity issued is value-destroying, deflating or depressing the earnings per share, even when the company’s net income increases, effectively paralyzing the company’s per share price, and (3) in an almost perverse irony, the incentive equity, which is priced at the deflated or depressed market value, is effectively in-the-money if the company would simply stop issuing vast amounts of incentive equity, and, therefore, it does not truly act as an incentive and, in fact, introduces a cultural hazard.

The third point may not be intuitive, but it is nevertheless true. Effectively, the company is significantly undervalued — something that anyone working at any higher level of responsibility within the company is aware off, and, therefore, there is surely an ingrained sentiment that whatever happens and whatever effort is expended by the recipient of the incentive equity (whether big, small, or just average,) there is going to be an incentive rewards at some point in the future. This not only neutralizes the options, but, also, creates a cultural hazard with (a) a very real risk that complacency will set in, and (b) the company’s value increase being determined not by the company’s actual operational performance,but, rather, by a Board of Directors’ and executive management team’s decision to issue or not issue options, effectively shifting control from the owners to an inside trigger-man.

Simply put, for incentive equity to work is must be a stretch, and for incentive equity to be justified, it must not materially and consistently depress or deflate the earnings per share.

Donations, please….

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