NEW CANAAN, Conn., April 28, 2014 /PRNewswire/ --
To our fellow Insperity stockholders:
Stadium Capital Management GP, LP and its affiliates
(collectively, "Stadium", "Stadium Capital", or "we") currently own
approximately 2.3 million shares of common stock of Insperity, Inc.
("Insperity" or the "Company") (NYSE: NSP), or about 9% of the
Company's outstanding common stock. We have been a
significant stockholder of the Company for more than five years,
and the Company's largest stockholder since the middle of 2012.
We released a letter on April 22,
2014 expressing our belief that Insperity is substantially
undervalued because of both poor operating results and severe
corporate government failures. In that letter, we explained why
Stadium intends to vote against the current slate of directors at
the upcoming annual meeting and also conveyed the substantial
governance changes we believe are required at Insperity to maximize
stockholder value. We view this vote against the current slate of
directors as only the beginning of a process intended to bring
attention to and maintain intense focus on substantive issues which
need to be resolved in order to maximize the value of Insperity for
the benefit of its non-management stockholders.
Later that same day, Insperity's Chairman and CEO, Paul Sarvadi, and Lead Independent Director,
Gregory Petsch, responded to us in a
letter that was published as a press release. Their letter is
remarkable in both what they included as well as what they chose to
leave unaddressed and it only confirms our serious concerns about
Insperity's governance and strategic direction. The content
of what they chose to address reveals a profound lack of
understanding of rudimentary corporate finance and corporate
governance principles. What they chose to leave unaddressed
are some of the most pertinent and substantive issues we have
raised, including details that they, as insiders, have access to
where all of us, as outside stockholders, do not. We will address
their troubling letter in detail below, and we encourage you to
read those details, but we first ask you to consider the following
fundamental questions:
- As a stockholder, are you happy with the performance of
Insperity's share price?
- Do you have any confidence that this Board will ever put an end
to Insperity's luxury executive lifestyle of limited
accountability, overcompensation, nepotism, private jet travel,
country club memberships throughout the country, luxury clubs at
baseball parks, and very expensive golf tournament sponsorships and
other wasteful golf-related marketing?
a. In light of how poorly the company has done and how abysmal the
Company's stock price performance has been over the last six years,
how do you feel about the fact that senior executives have received
more than $50 million in total
compensation during that time?
b. Does it sit well with you that while the company has massively
underperformed its own plans and its peers, this Board has deemed
it fit for management to spend almost $40
million of stockholder money since 2005 on multiple huge
private aircraft so that these same senior managers can fly them
for hundreds of hours a year, again at stockholder expense? And
even use these airliner-sized planes on an unlimited basis for the
CEO to commute between multiple residences and the Company's
headquarters, all at stockholder expense?
c. Do you actually believe that this Board and management team will
ever address these issues, in particular when members of management
and the Board have multiple family members working for the
company?
- Does anyone other than purportedly management and the Board
have confidence that Insperity will come anywhere close to
achieving its strategic plan outlined to stockholders in 2011?
- After years of poor performance by this management team and
Board, and in light of this Board's continuing refusal to realize
significant cost savings by eliminating the Company's culture of
excessive "lifestyle" expenses and perquisites, do you believe this
Board will ever take the appropriate actions to maximize value for
non-management stockholders?
We are not happy with the performance of Insperity's stock
price
Although stockholders likely need no reminder, below
is a chart showing Insperity's Total Shareholder Returns, including
the impact of dividends and share repurchases, versus the Russell
2000 and Insperity's Peer Group Index1. As we
stated before, this chart speaks for itself2. As
patient, long-term owners, we have specifically chosen long term
metrics to evaluate this management team and the Board. Any
notions that our actions are short-term or self-serving at the
expense of other stockholders are of course absurd and inconsistent
with the facts. We would imagine that other stockholders
would also appreciate an acceleration of pent-up value creation at
Insperity.
Photo - http://photos.prnewswire.com/prnh/20140428/81085
We do not have confidence Insperity will come anywhere close
to achieving its strategic plan
While the Company's
management and Board seem to believe Insperity is on an acceptable
course to achieve its 2011 operating plan, we disagree. In this
operating plan, implied EBITDA for 2015, as derived from the
Company's five-year operating income target, is approximately
$195-$250 million3.
Management's most recent guidance for 2014 EBITDA is approximately
$76.0-$90.5
million4. We certainly do not believe
management can triple EBITDA between 2014 and 2015, nor do we
believe results over the past several years indicate that
management is on a reasonable path to achieve this goal even if
given more time. In light of these facts, we remain
astonished that management and the Board can apparently remain
"optimistic" about their plan.
We believe Insperity's governance is flawed and the Board is
neither committed to nor capable of maximizing value for
non-management stockholders
- Insperity does not have "strong" corporate governance. In
fact, corporate governance is poor. Messrs. Sarvadi's and
Petsch's letter offers no defenses for having a staggered board, a
combined CEO and Chairman role or Insperity's poison pill.
Even alone each of these anti-stockholder measures significantly
reduces the Board's effectiveness and accountability to
non-management stockholders. The combination is a major concern to
us.
- In Messrs. Sarvadi's and Petsch's letter, they try to give the
Board credit for "adopting majority voting" for directors last
year. We find this disingenuous and insulting. The
truth is that this measure was put to a stockholder vote last year
after a stockholder, The California State Teachers' Retirement
System ("CalSTRS"), initiated it—not the Board. In fact, the
Board explicitly recommended that stockholders vote against
the measure, as they deemed it "unwarranted and unnecessary" and
"not necessary to improve our corporate governance" 5.
Only after stockholders overwhelmingly disagreed
with the Board's view and approved the measure (77% of all votes
cast voted for the measure, and presumably a far higher
percentage of non-management, non-director stockholders), did the
Board implement the provision.
- Messrs. Sarvadi and Petsch provided no explanation for why the
Board has not held management accountable for failing to achieve
meaningful progress against its 2011 operating plan, or why it
continues to allow excessive management compensation, along with
lavish perquisites and benefits, while management has failed to
generate any EBITDA growth in the past six to seven years.
- Neither Messrs. Sarvadi and Petsch nor the head of the
Compensation Committee, Eli Jones,
has provided any explanation for why annual cash bonuses have been
so easy to achieve and why stock awards are not subject to
performance-based vesting. This is a clear signal to us that the
Board lacks independence from management.
- Messrs. Sarvadi and Petsch provided no details on how this
management team can turn around its operating performance or
improve its public perception and valuation in the
market.
- Messrs. Sarvadi and Petsch demonstrated a disturbing lack of
basic corporate finance knowledge by suggesting that stockholders
and potential investors should use a MarketCap/EBITDA valuation
metric in evaluating the Company compared to its Peer Group.
It should concern all stockholders that the Board does not
understand the difference between Enterprise Value and Equity
Market Capitalization and why EBITDA cannot be used as the
denominator for any metric based upon the latter. The
difference, of course, is the existence of net cash or net debt,
and the costs of servicing or benefits received from that
capital. As such, using MarketCap/EBITDA is simply financial
nonsense. Valuing Insperity based on a P/E multiple is also
misleading because of the Company's substantial excess cash.
Insperity's excess cash is not needed to generate net income and
should be subtracted from its Market Cap before calculating any
valuation ratios6.
- Messrs. Sarvadi and Petsch provided no explanation for why
owning two enormous aircraft (37-passenger EMB-135s, retrofitted
and configured for luxury corporate travel) is in the best
interests of non-management stockholders. They chose to share
no data related to the amount of stockholders' capital that is used
to own the aircraft or any analysis of the costs and benefits of
their use. Furthermore, no explanation was provided for why it is
in the best interests of stockholders to have the Company's CEO
live in one city and commute to headquarters and company facilities
in other locations via such a large airplane, regardless of whether
it is quasi-daily or weekly. For the record, between Dallas (the CEO's primary residence evidently)
and Houston, there are commercial
flights essentially every hour all day for less than $250 round trip.
The section below contains verbatim excerpts of Insperity's
press release, including Messrs. Sarvadi's and Petsch's letter to
us. We have included our responses to the issues they raise
in bolded italics in the appropriate sections.
- "Stadium Capital's letter and press release are full of
inaccuracies and mischaracterizations as detailed in the Board's
response, including:
- Insperity's reported adjusted EBITDA actually increased 12%
from 2011 to 2013 (not a decrease of 6% as reported by Stadium
Capital), which is in line with the public competitors cited in
Stadium Capital's letter, and represents a 67% increase since 2009.
"
Insperity's EBITDA, adjusted for non-recurring items, did
in fact decline between 2011 and 2013, which is in sharp contrast
to its peers. During 2011, management specifically
highlighted, in press releases, earnings calls and SEC filings,
expenses attributable to the Company's rebranding efforts and
non-specific acquisition expenses. To state the obvious, it is not
every year that a company changes its corporate identity. In
this case, Insperity spent approximately $12
million in 2011 to "rebrand" itself from "Administaff" to
"Insperity". Adding these re-branding and other costs back to
EBITDA presents a more accurate picture of the underlying
profitability from year to year, and is therefore how we have
always calculated and analyzed Insperity's EBITDA internally at
Stadium Capital. Apparently, when it suited their purposes in
2011, management agreed with us by calling out these items as
extraordinary expenses. In our original letter to the Board
and to stockholders on April
22nd, we footnoted all adjustments we made to
GAAP results.
In conversations with the CEO several weeks ago, we
specifically discussed how we calculated this number. The
Company's argument here appears to be that Insperity would be
"growing" if we just believed that the ongoing business was less
profitable than management had led us to believe in the past. We do
not find this especially comforting.
- "Executive compensation is directly impacted by our
performance, as reflected in the CEO's 2013 compensation decline of
12%; and was most recently supported by the leading proxy advisor
firms and 92% of the stockholders."
The vote Messrs. Sarvadi and Petsch are referring to was
in early 2013, before management reduced guidance several times
throughout the year and issued disappointing guidance for
2014. We admit that we can be faulted in the past for having
been too patient and accepting of the compensation structure at
Insperity in light of its operating performance.
- "The CEO's total compensation, including commuting and other
perquisites, is reasonable. In fact, the proxy report of ISS issued
in 2013 placed him near the bottom quarter of peers."
We would challenge anyone who would suggest that commuting
between Dallas and Houston via an enormous private aircraft is
reasonable. Indeed, we believe that the Board's willingness to
allow the CEO free use of a Company-owned, luxury private jet to
commute between Dallas and
Houston demonstrates, by itself,
the governance failures at the Company. We simply do not
understand how the Board can justify these kinds of benefits,
particularly in the context of continually disappointing operating
results over many years.
- "Stadium Capital overstated the total executive compensation
for all named executive officers over the past five years by
14%."
In our letter of April
22nd, we cited executive compensation over six
years, not five. We did, however, make a typo in our press
release, which should have read six years, not five, to match our
letter. Our point remains.
- "In the letter, Stadium Capital failed to properly consider
Insperity's multi-year strategic plan."
We do not understand this point. As other stockholders
undoubtedly have, we have read the Company's multi-year strategic
plan, which we in fact attached to our recent SEC filing. In
our letter of April 22nd
we compared the trajectory implied by this plan to the Company's
actual results. Is the Company suggesting they are on track
to achieve this plan? Is there another plan we stockholders don't
know about?
In addition, we have also considered Insperity's other
initiatives over the past few years (e.g., re-branding, re-pricing,
bundling, unbundling, increasing the sales force, reducing the
sales force, retraining the sales force, technology investments,
etc.) and all of the corresponding fits and starts. The
results that stem from these plans have taken us to where we are
today: the Company continues to underperform its peers and the
market. Based upon the Company's historical results over the
past few years we do not have confidence that this management team,
acting under the supervision of this Board, will achieve the
results set forth in the strategic plan.
- "Numerous corporate governance initiatives were implemented
over the past two years."
We find this argument remarkable. The facts are that
Insperity has a staggered Board, a combined Chairman and CEO role
and a poison pill. As all stockholders know, these types of
provisions, individually but especially in combination, are large
obstacles to holding board's accountable and ultimately shareholder
value creation. In addition, we view the appointment of
Greg Petsch as Lead Independent
Director in 2012 as a half-hearted measure and not a positive
development.
Again we note that in their
response, Messrs. Sarvadi and Petsch
chose to cite "majority voting" as an example of their
governance efforts. As we discussed above, the Board's
decision to adopt "majority voting" for directors last year was
made only after 77% of all votes cast voted for the
measure, and presumably a far higher percentage of non-management,
non-director stockholders. Further, in the
Company's 2013 Proxy Statement, when this provision was to be voted
on by the Company's stockholders (after CalSTRS submitted the
proposal) the Board explicitly recommended that stockholders vote
against the measure, as they deemed it "unwarranted and
unnecessary" and "not necessary to improve our corporate
governance". In light of the Board's statements to
stockholders about majority voting in the Company's 2013 Proxy
Statement, we question how the same Board can now claim that it
adopted majority voting as a demonstration of its commitment to
good corporate governance.
"Stadium Capital Rejected a Reasonable Proposal by Insperity
- Despite being a stockholder since 2004 (and a major stockholder
since 2008) and a long history of open dialogue, Stadium Capital
first raised these concerns in the past few weeks."
We have had many conversations with management over many
years on a variety of matters, including those we addressed in our
letter. Messrs. Sarvadi and Petsch even acknowledge such past
communications on capital structure in their response. We do
not know why management does not remember these
discussions.
- "During recent discussions, Stadium Capital focused upon the
number of seats that it could obtain on the Board and not on the
other issues that were raised in its letter."
In addition to discussing many issues over multiple
conversations, we strongly believe multiple new directors are
required to effect substantive change. In our view, the
serious issues Insperity faces warrant a significant change on the
Board, if meaningful improvement is to be achieved. A single
director may not be able to drive the level of change we believe is
in the best interests of all shareholders. We expect
most stockholders or investors will understand why the number of
board seats is important in this context.
- "Despite making allegations of governance failures at
Insperity, Stadium Capital demanded to circumvent important
corporate governance policies and procedures designed to protect
the interest of all stockholders."
This is simply not true. At Insperity's request,
representatives of Stadium Capital traveled to various locations
across the country to meet a number of Insperity's directors.
We did this at our own expense (and without the use of any private,
luxury aircraft). Stadium Capital's representatives
participated in all of the processes that Insperity's Board
requested. Nevertheless, despite these efforts Insperity was
unwilling to compromise by offering Stadium Capital meaningful
representation on the Board.
- "Stadium Capital rejected the Board's offer to add a Stadium
Capital employee and another new independent director, potentially
from another large stockholder, to the Board."
As we have stated before, given our view of the
dysfunction of this Board, one board seat is insufficient to effect
the changes needed to maximize value for all non-management
stockholders. The Board only offered us one seat. The notion
of a potential second seat for another new director was raised, but
only as a possible outcome at a later date. We had made it
completely clear to the Board that in our view two seats is the
bare minimum necessary to create adequate representation for
non-management stockholders on the Board.
- "Insperity has made $69 million
of stock repurchases and paid $103
million in dividends over the past five years."
It surprises us that Messrs. Sarvadi and
Petsch would highlight these points, as it is clear
that these small measures have neither corrected a massively
inefficient capital structure nor helped produce acceptable
stockholder returns. Insperity held $94 million in excess cash at the end of 2008 and
$105 million in excess cash at the
end of 20137.
- "Insperity is focused on and committed to executing its
multi-year strategic plan."
We remain astonished that Messrs. Sarvadi
and Petsch continue to express this point of view.
As we have shown, management is nowhere close to achieving
its publicly communicated strategic plan. This lack of execution is
core to our views and actions and underlies all of our grave
concerns about the lack of oversight, and accountability demanded
by the Board.
- "The Board is committed to ensuring that the company is on a
path that is in the best interests of all of the stockholders and
does not become beholden to the individual interest of any one
stockholder."
Any stockholder reading this statement ought to be on high
alert. The only Board members with any real ownership are also
members of senior management – the same people who have received
extraordinary levels of compensation, benefits and perquisites in
spite of producing truly disappointing operating results. Excessive
compensation to these manager/owners accrues to them, almost
totally at the expense of non-management stockholders.
Stadium Capital is of course 100% aligned with other non-management
stockholders, and any suggestions by Messrs. Sarvadi
and Petsch otherwise are disingenuous at
best.
"The Board also expressed its disappointment that, after
spending significant time and effort considering Stadium Capital's
requests and speaking nearly daily to its representatives during
the past several weeks, Stadium Capital has chosen this route. The
Board prides itself on its accessibility and responsiveness to all
stockholder concerns, and reaffirmed its commitment to serving the
interests of all stockholders and executing on its strategic plan
going forward."
As a patient, long-standing investor we also dedicated
substantial time over the last several weeks in an attempt to
resolve our concerns, privately discussing our mounting concerns
with management and the Board. It was our frustration with this
process, and the Board's refusal to acknowledge the profound issues
driving these concerns, that ultimately led us to explain publicly
our intention to vote against the current slate of Insperity
directors.
"Since receiving your March
24th letter, we have been in almost daily contact
with you as part of that commitment. So, it is particularly
frustrating that you have now decided to pursue this disruptive
course despite not raising any of these concerns until very
recently. But because you elected to abandon a constructive process
and rejected our offer to join the Board, we must set the facts
straight. "
We did not abandon the process. After repeated
discussions between us and Mr. Sarvadi as Chairman of the Board,
the Board rejected our compromise proposal for the addition of two
directors designated by Stadium Capital and refused to remedy, or
even address, the other issues we have raised.
"Since first learning of your concerns and demands last
month, we have worked extensively with you to reach a satisfactory
resolution. At your request, we focused on your primary concern,
which was your demand that the company appoint, on an arbitrary and
unreasonable timeline, Stadium Capital designees to the Board.
"
The Board appears to have some concerns about the timing
of Stadium Capital's actions. Our timing is solely driven
by:
(1) Our continuing erosion of faith in
management and the Board. The "straw that broke the camel's
back" was management's disappointing guidance for 2014 delivered on
February 10, 2014 and our analysis of
this in the following days and weeks. This information was
conveyed to the market essentially concurrently with the deadline
to submit an opposing director slate or make stockholder
proposals.
(2) The upcoming annual meeting in
May. We needed to know whether we would be seated on the
Board and in a position to effect real change well before our vote
was due. Furthermore, on behalf of all stockholders, we did
not want to wait until the 2015 annual meeting and take the risk of
an additional year of poor operating results and Board
oversight.
"Although the Board determined that the perspective of a large
stockholder such as Stadium Capital would be valuable, the Board's
view was that having more than one representative of Stadium
Capital would not provide any additional diversity of views or
perspectives beyond what a single Stadium Capital representative
would bring. In accordance with this conclusion, we offered Stadium
Capital one seat on the Board. "
The Board's role is to represent the Company's
stockholders' (its owners') interests. Having a "diversity of
views" is beneficial to the Company and its stockholders only if
these "diverse" views focus on maximizing the long-term interests
of the stockholders. Insperity's seven non-management directors,
who collectively own 0.7% of Insperity, may offer a "diversity of
views", but stockholders are best served by directors whose views
are clearly aligned with their best interests. Every Stadium
Capital representative on the Board would think and act like an
owner of the business, because we in fact are the largest owner of
the business.
"The Board also made clear to you that it is amenable to adding
an additional new independent voice to the Board, including
potentially from another large stockholder. As a member of the
Nominating and Corporate Governance Committee, a Stadium Capital
representative would have had substantial influence over this
process of adding an additional independent director. "
In our repeated discussions with the Board, Stadium
Capital made absolutely clear that one director designated by
Stadium Capital was insufficient to effect the change needed at
Insperity. Instead, the Board offered vague promises about a
"potential" future non-Stadium designee joining the Board, and
refused to reconsider this position. This, on top of the Board's
inability or refusal to address the serious management and
governance issues we had raised over several weeks, left us with no
other prudent choice on behalf of ourselves and all other
non-management stockholders.
"Since we first announced our current strategic plan in
2011, you have always expressed support for our plan in the
numerous meetings we have had with you. Our recent discussion with
you on February 18th,
which followed the company's most recent earnings announcement, was
no different. During that discussion, you did not raise the alleged
issues that you have now cited and did not express any desire for
significant changes. In fact, you did not raise any concerns about
our 2014 operating plan and specifically expressed support for our
announced 2014 technology investments, with a full understanding of
the expected impact of those investments on our results. So, we
were quite surprised when you unexpectedly delivered a letter to us
on March 24th in which you
raised a list of criticisms for the very first time, many of which
you chose to repeat in your latest letter. "
Messrs. Sarvadi and Petsch are correct that
we, like other stockholders, were supportive of the 2011 plan – a
plan Insperity has since missed by a wide margin. We are
baffled by the comments about our "support" throughout their
letter. We have been clear about our concerns. For example, in the
fall of 2013, we conveyed to management our strong desire for
management to improve Insperity's technology platform, after many
of our customer calls highlighted the concern that the Company was
falling behind the competition. These findings and our
suggestions took management by surprise and, in fact, management
dismissed the need for any specific investment initiative. We were
surprised management did not know the competitive state of its own
technology, and were disappointed that management expressed a lack
of interest in pursuing this at the time. We were less
surprised in February 2014 by the
announcement that, in fact, technology needed to be improved and
that the Company would need to make investments in this area to
remedy the situation.
"Throughout this dialogue, however, you never sought a
meaningful discussion of your alleged concerns. Instead, you tried
to impose arbitrary and unreasonable deadlines, including your
demand that Insperity evaluate and appoint multiple Stadium Capital
employees as directors in less than two weeks. "
There was nothing arbitrary or unreasonable about
Stadium's process. The Board has the full authority to
appoint new directors without delay. As we have noted above,
we worked hard to find a constructive and private path to obtain
sufficient Board representation.
- "Insperity's reported adjusted EBITDA1 actually
increased 12% from 2011 to 2013, which is in line with the public
competitors cited in your letters, and represents a 67% increase
since 2009. "
As discussed above, Insperity's EBITDA, adjusted for
non-recurring items, did in fact decline between 2011 and 2013,
which is in sharp contrast to its peers. During 2011,
management specifically highlighted, in press releases, earnings
calls and SEC filings, expenses attributable to the Company's
rebranding efforts and non-specific acquisition expenses.
Adding these costs back to EBITDA presents a more accurate picture
of the underlying profitability from year to year, and is
consistent with how we have always calculated and analyzed
Insperity's EBITDA internally at Stadium. Apparently, when it
suited their purposes in 2011, management agreed with us. In our
original letter to the board and to stockholders on April 22nd, we footnoted all
adjustments we made to GAAP results.
In conversations with the CEO several weeks ago, we
specifically discussed how we calculated this number.
Messrs. Sarvadi's and
Petsch's argument now appears to be that Insperity
would be "growing" if we just believed that the ongoing business
was less profitable than management had led us to believe in the
past. We find this not especially
comforting.
- "Your market value analysis focuses on a comparison of Total
Enterprise Value / LTM EBITDA to create a negative view of our
valuation while ignoring other important and relevant valuation
methods, such as the company's Price-to-Earnings ("P/E") and Market
Capitalization / LTM EBITDA ("MarketCap/EBITDA") multiples, which
are comparable to the company's competitors. As of April 21, 2014, Insperity's P/E multiple is 22x,
which is above the S&P 500 of 18x and comparable to the public
competitors cited in your letter today, which are trading at an
average of 25x P/E multiple. In addition, Insperity's Market
Cap/EBITDA multiple is 9x as of April 7,
2014, which is comparable to the Market Cap/EBITDA multiple
of a PEO competitor that recently completed its initial public
offering. "
Please see our response above about the absurdity of a
MarketCap/EBITDA multiple. We are disturbed that the Board does not
understand basic corporate finance. Messrs. Sarvadi's
and Petsch's comments would imply, in effect, that
cash is worth nothing. This lack of financial acumen might explain
the Board's inability and reluctance to capitalize Insperity
appropriately over the years, in spite of our repeated attempts to
convey our views on this privately and constructively over that
time.
"Insperity has a demonstrated track record of returning capital
to its stockholders, as evidenced by its $69
million of stock repurchases and $103
million in dividends over the past five years. The Board
also regularly considers other ways to enhance stockholder value,
such as the company's $50 million
tender offer for its own shares, for which Stadium Capital
advocated, in December 2012. "
Please see our discussion of this above. It is interesting
to note, however, that here Messrs. Sarvadi and
Petsch acknowledge our support for the 2012 tender
offer while claiming we have never addressed our concerns with
management. Furthermore, we have no insight into why management
failed to implement this 2012 tender offer
successfully.
- "Insperity is committed to strong corporate governance. For
example, in the last two years alone, the Board has implemented
stock ownership guidelines, created a lead independent director
position, added a new independent director, implemented
"double-trigger" vesting of stock awards following a change of
control, prohibited hedging and new pledges of shares, adopted
majority voting for election of directors and implemented a
clawback policy. "
Insperity does not have "strong" corporate
governance. To repeat, Messrs. Sarvadi's and
Petsch's letter offers no defenses for having a
"murderer's row" of anti-stockholder provisions - a staggered
board, a combined CEO and Chairman and a poison pill. The
combination of these anti-stockholder measures continues to concern
us.
The Board cannot take credit for "adopting majority
voting" for directors last year. This measure was put to a
stockholder vote last year not at the Board's instigation, but
instead by a stockholder. The Board explicitly recommended
that stockholders vote against the measure, as they deemed it
"unwarranted and unnecessary" and "not necessary to improve our
corporate governance". Stockholders, by contrast,
overwhelmingly approved the measure the board rejected (77% of
votes cast voting for the measure, and presumably a much higher
percentage of non-management, non-director
stockholders).
- "You compared Insperity's financial performance and valuation
to a group of companies identified as peers solely for compensation
purposes. The purpose of this compensation peer group, which was
developed with the assistance of the Compensation Committee's
outside compensation consultant, is to compare the company's pay
practices to those companies with which it competes for talent and
not as a financial performance measure. Further, even if
applicable, a cursory review of the compensation peer group reveals
that the inclusion of certain performance outliers, such as
pure-play SaaS companies, significantly distort any such financial
comparison."
We are confused by this illogical notion.
Messrs. Sarvadi and Petsch are suggesting
that the Board should set compensation
levels based on this higher performing Peer Group Index, while
stockholders should measure their results by a different,
undisclosed and poorer-performing index. We do not understand how
this concept serves the interests of non-management
stockholders.
- "Insperity's compensation plans, which are designed with the
assistance of outside consultants and consider market analysis, are
reasonable and are aligned with the company's performance, as
evidenced by:
- The reduction in compensation that the company's executives
received in 2013. For example, the CEO's compensation was reduced
by 12% in 2013 as compared to 2012, returning his compensation to
2008 levels and underscoring the fact that the company's executive
compensation is tied to the speed at which the new business
strategy is executed and positive results obtained. "
The facts are that EBITDA for Insperity has been
essentially flat for six years, and senior management members have
received more than $50 million in
total compensation over this same time period. This is in the
context of a company that produced $92
million in EBITDA in 2013 and is guiding for $83 million in EBITDA at the midpoint for 2014.
In addition, while making no forward progress for us as
stockholders, senior management has been gallivanting around the
globe on not one, but two gigantic private aircraft at our expense.
Stockholders can read the flight logs we attached to our
April 22nd SEC filing for
themselves, and wonder what "business" was being conducted in
Scotland (at least 10 trips in
three years, including two where both aircraft were used),
Ireland, Bermuda, Cabo San
Lucas, Augusta, GA and
other obvious vacation/golf destinations. We could go on. None of
this passes the smell test.
- "Your analysis of the use and cost of the company's corporate
aircraft is flawed in many respects. Contrary to your insinuations,
the substantial majority of use of the aircraft is for business
purposes and for chartering to third parties when not in use by the
company. You substantially overstated the incremental costs of the
aircraft by failing to consider the significant revenue received
from third party charters, the reimbursement received from
executives for their limited personal use and the costs that would
be incurred for alternate commercial flights. In addition, Mr.
Sarvadi's use of the aircraft for commuting, which represents only
a small fraction of the overall use of the aircraft, is generally
from the Dallas area to corporate
headquarters on a weekly basis, not "quasi-daily." The value of
this use is taken into account by the Compensation Committee in
setting his overall compensation and it is included in total
compensation as reported. The Board considers the company's need
for the aircraft in light of its overall business and the
commitment to excellence in service and responsiveness to clients,
employees, prospective clients, vendors and stockholders. "
Stockholders should not pay to have their CEO commute via
one of two enormous company-owned airplanes between Dallas and Houston. Owning and operating these aircraft
is a gross misuse of stockholder resources. We are not reassured by
the fact that the Company attempts to offset some of the enormous
cost of owning and operating two massive aircraft by chartering to
third parties. Insperity is not in the aircraft leasing
business and has no business owning two planes, whether they are
used for the CEO to commute to work, dubious business purposes or
for third party charters.
- "Your new criticisms about the CEO's stock pledges are without
foundation. These pledges pre-dated the company's implementation of
its stock pledging policy. Detailed information concerning the
pledging has been fully disclosed in the company's proxy statement,
including the Board's review and determination that the amount of
shares pledged was insignificant. Further, as disclosed in the most
recent proxy, the number of shares pledged by Mr. Sarvadi has
decreased."
Messrs. Sarvadi's and Petsch's explanation
is illogical and troubling. It is an odd notion that governance
changes should have "grandfathering" clauses, as they suggest in
the context of the pledging of the CEO's shares. However
significant or insignificant the share pledges are, they still
violate the Board's policy. The pledging policy is either in place
and enforced or it does not really exist.
- "Our executive officers and directors collectively own more
than 11% of our outstanding shares, an amount that exceeds the
holdings of Stadium Capital and that firmly aligns our management's
interests with that of our stockholders. Notably, Mr. Sarvadi, who
was a co-founder of the company, is the 3rd largest
stockholder and Richard Rawson, who
was a stockholder for many years prior to the company's initial
public offering, is the 11th largest stockholder. "
Please see our discussion of this above. Management
stockholders (e.g., Sarvadi and Rawson) are inherently conflicted
on these issues, and non-management Board members collectively own
only 0.7% of the Company.
Conclusion
The Board's response, delivered by Messrs. Sarvadi and Petsch,
only reinforces our strong conviction that it is time for immediate
change at Insperity and highlights new concerns about the
governance capabilities, business judgment and financial acumen of
the Board. We fear that little may be accomplished without
direct and active stockholder involvement and a clear rejection of
the status-quo. For this reason, we intend to vote AGAINST
Insperity's current Board slate and urge our fellow stockholders to
consider what we have outlined above and in previous letters when
they cast their votes in the coming weeks.
If you have already voted your shares, you have every right
to change your vote. Please see Insperity's proxy statement for
additional information. Copies are available for free on the SEC's
website (www.sec.gov) or by contacting the
Company.
Sincerely,
The Investment Committee of Stadium Capital Management GP,
LP
Alexander M. Seaver, Co-founder
and Managing Director
Bradley R. Kent, Co-founder and
Managing Director
Dominic P. DeMarco, Managing
Director and Co-Chief Investment Officer
John L. Welborn, Jr., Managing
Director and Co-Chief Investment Officer
THIS IS NOT A SOLICITATION OF DIRECT OR INDIRECT AUTHORITY TO
VOTE ANY PROXIES. PLEASE DO NOT SEND STADIUM YOUR PROXY CARD.
STADIUM IS NOT ABLE TO VOTE YOUR SHARES AND THIS COMMUNICATION DOES
NOT CONTEMPLATE SUCH AN EVENT.
Notes:
(1) The Peer Group Index is defined using Insperity's most
recent compensation peer group per the Company's 2014 proxy filing
and includes the following 15 companies: Automatic Data processing,
Inc., CBIZ, Inc., Cognizant Technology Solutions Corporation,
Concur Technologies, Inc., Convergys Corporation, Genpact Limited,
Korn/Ferry International, Paychex, Inc., Resources Connection,
Inc., salesforce.com, Inc., Towers Watson & Company, The
Ultimate Software Group, Inc., Gartner, Inc., Intuit, Inc., and
Web.com Group, Inc.
(2) Total shareholder returns data was obtained from Capital IQ.
Total shareholder returns are adjusted to include dividend payments
and assume that dividends are reinvested into the stock as of the
pay-date. The Russell 2000 Total Return Index also includes
dividend reinvestment. The Peer Group Index is equal-weighted,
whereas the Russell 2000 Total Return Index is market-cap
weighted.
(3) The FY 2015 outlook range was taken from Insperity's investor
day presentation on 3/31/11. Assumptions for depreciation,
amortization, and stock-based compensation were made in order to
arrive at an estimated EBITDA for FY 2015. These are based on
historical trends.
(4) FY 2014 guidance was taken from Insperity's Q4 2013 earnings
call held on 2/10/14.
(5) Page 38 in Insperity's 2013 proxy filing filed with the SEC on
3/28/13.
(6) While (MarketCap less cash)/Net Income is a better measure than
a simple P/E, it is still flawed because interest income from that
cash is included in Net Income. In the current zero interest
rate environment, however, this impact is likely small.
(7) Excess cash is defined as cash and cash equivalents, plus
marketable securities, less overnight withholdings associated with
federal and state income taxes, employment taxes and other payroll
deductions, and less client prepayments. This is likely a
conservative measure of cash, as it excludes potential "float"
aspects of Insperity's business.
Contact:
John Welborn
Stadium Capital Management
203-972-8235
jwelborn@stadiumcapital.com
SOURCE Stadium Capital Management GP, LP