As promised, on March 10 PICO Holdings released its Preliminary Proxy Statement. Given that financial statements represent the highlight of our lives, we perused it over the weekend. There was much to like.
The 2017 PICO Proxy
We will review the Proxy Statement highlights and point out some interesting factoids.
Voting for Directors will be a far more pleasurable experience this year: all candidates deserve our votes. Thus far, these men have markedly improved PICO in all respects: corporate governance, asset sales, communication, accountability, expense reduction. Let’s not forget, four of the five candidates took bold action in December 2016, removing two self-interested Directors that exercised control. All five nominees will get RPN’s votes.
The fused CEO/Chairman proposal doesn’t stand a chance and we will vote “Against.” Max Webb has thus far done a fine job as CEO, but he has an almost-two decade track record of silence in the face of shareholder abuse. We believe that a Chairman’s first reaction to abuse of owners should be a clenched fist, followed by a self-imposed “Time Out” in order to avoid a fight.
This description does not apply to Mr. Webb.
Proposals 3-5 are simple. Compensation at PICO has improved markedly, although after the corruptly conceived Juicer Employment Agreement, it only could have gotten worse if PICO were donated to John Hart.
We would have preferred a compensation plan that started from scratch, call it “Zero-Based Compensation.” But that was not an option. The PICO Board was legally obligated to use the Juicer Employment Agreement as a starting point. As a result, both Director and Executive Compensation are acceptable, but on the high side of fair. The only aspect of PICO Compensation that induces a frown today is the glaring absence of a time value of money component.
Delaware Reincorporation 3.0
Delaware Reincorporation, and the related authorization for adjournment, make their third appearance on a PICO proxy. The Reincorporation Proposal was mostly produced by cut and paste – which is good for owners cuz it reduced legal costs.
The stated rationale for the Delaware Reincorporation Proposal is protection of Net Operating Losses. The NOLs provide an offset to operating profit and/or capital gains (calculated from tax basis – not carrying value). However, if an “ownership change” occurs, as defined by Section 382 of the Internal Revenue Code, utilization of the NOLs would be significantly limited, reducing their value.
Below is an abbreviated definition of an ownership change:
“An ownership change occurs if on a testing date the percentage ownership of one or more 5% shareholders has increased by more than 50% over the lowest percentage during the testing period, for any 3 year period preceding the testing date.“
Yeah, it gets complicated. A more thorough examination is beyond the scope of this post. Beyond our pay grade. And beyond our mental faculties.
Last year, shareholders appropriately voted down Reincorporation Proposal 2.0. Shareholders risked the economic value of the NOLs in exchange for retention of greater influence over PICO corporate governance. Thus far, this bet has paid off and we salute all shareholders who voted “Against” Reincorporation Proposal 2.0 and “Against” Adjournment last year.
This year, RPN will vote “For” the Reincorporation Proposal 3.0 for three broad reasons. First, there are improvements to the Reincorporation Proposal. Most important to many shareholders, the 2017 Reincorporation Proposal maintains cumulative voting. It also retains other shareholder protections, namely the ability take action by written consent and a 10% threshold to call a special meeting.
Last year, Andy Shapiro of Lawndale Capital Management, astutely made much of the blank check preferred stock provisions, which he noted, could be used in manners adverse to shareowners. The 2017 Reincorporation Proposal addresses this concern with the following provision in the Certificate of Incorporation:
b . Notwithstanding Section 4.4(a) above to the contrary, without stockholder approval, the Board is only authorized to provide by resolution or resolutions from time to time for the issuance, out of the unissued shares of Preferred Stock, of one or more series of Preferred Stock by filing a Preferred Stock Designation, solely in connection with the Corporation’s adoption of a tax benefits preservation plan.”
We thank Mr. Shapiro for championing this issue.
Sharp-eyed readers likely noticed the absence of director removal by majority vote from Reincorporation Proposal 3.0. The 2016 Reincorporation Proposal provided:
“The Delaware Certificate allows for the removal of a director by the vote of a majority of the shareholders.”
This provision was removed from the 2017 Reincorporation Proposal. We were not pleased at first, but a little research yielded the rationale. Under Delaware General Corporate Law, when shareowners enjoy cumulative voting, directors cannot be removed without cause (unless the entire board is removed) if the number of votes cast against such removal would be sufficient to elect the director under cumulative voting.
In other words, the removal by majority vote in the 2016 Reincorporation Proposal was a result of the absence of cumulative voting. We breathed easier.
The second area of improvement which motivates us to vote “For” Reincorporation 3.0 involves the people. These Directors are different; up until now, these gentlemen have proven themselves to be shareholder oriented and trustworthy. Corporate governance has been improved, capital is poised to be returned and promises have mostly been fulfilled. Greater integrity deserves greater trust.
The third reason we will vote for Reincorporation 3.0 relates to corporate governance improvements. Implementation of best practices at PICO have left these Directors sufficiently vulnerable such that owners can implement change quickly and easily, if necessary. “Vulnerable” might not be the best word, perhaps “accountable” would be better. But with hard delcassification, cumulative voting, Director compensation paid in shares and two large shareowners on the Board, we feel that NOL protection can be prioritized over maximum equityholder rights.
There are PICO hawks who plan to vote against Reincorporation 3.0. The hawks make two justifications for their posture. First, they say that the main motivation for Delaware Reincorporation is to reduce Directors’ personal liability and increase legal indemnification.
We don’t know if it is the “main” motivation, but it is inarguable that PICO Directors will sleep better if Delaware Reincorporation is effectuated.
Second, the hawks argue that the corporate governance improvements are nice, but the ultimate measure of shareholder orientation is still missing: return of capital. According to the hawks, one more year of greater Director accountability is in order. Once owners have some dead presidents in hand, the leash can be loosened and PICO can be reincorporated in Delaware.
This second hawk argument has merit; to the best of our knowledge, no capital return has begun. But as we survey the entire PICO panorama, taking in all the factors we mentioned above, we will give this Board the benefit of the doubt.
And we expect prompt return of capital to avoid making RPN look stupid.
Before you vote, you should know that we have been wrong in this area before. We were optimistic about, and wrote favorably of, Raymond “Delaymond” Marino, Hapless Howie Brownstein and James Pirrello, all of whom have turned out to be shareholder disappointments. RPN’s resolution for 2017 is to be better evaluators of character.
We understand that this Board has a complicated decision regarding return of capital. There are several options, all with costs, benefits, supporters and detractors. But as our Crack Strategist said: “Look, even if you buy back 10,000 shares per day at an accretive price, that’s still accretive to shareholder value.”
Given PICO’s current share price, we believe the Board should begin repurchasing shares, even if in only token amounts. Token value creation is better than no value creation. PICO could alert owners to the buyback before the Annual Meeting with a press release covering other sundry matters, with mention of capital return in an “Oh by the way” fashion. That way, RPN could advocate for Reincorporation 3.0 with confidence and PICO hawks would be quieted.
PICO Proxy Trivia
Trivia 1: The PICO Board met 24 times in 2017. Twenty-four times! That’s about once every two weeks. The average Board in a typical year might meet 10 times; 15 is considered frequent. Twenty-four times is off the chart.
We believe the inordinately high meeting frequency was due to a few factors. First, the initial months of 2016 were a stormy sea of changes, fights, shifts and controversies. Second, once “Delaymond” Marino became Chairman, all PICO matters took up far more time, energy and money than necessary. Third, during the latter half of the year, there has been a lot to do – asset sales, compensation agreements, committee assignments, a palace coup… the list goes on.
Trivia 2: This is a young Board. The average age is 45 years old and Mr. Webb is the senior Director at a whopping 55.
Trivia 3: Audit fees paid to Deloitte & Touche LLP came down about $357,000 or 16%. It is hard to give credit where it is due. Audit fees came down about the same amount from 2015 to 2016 when Kristina “Malificent” Leslie and Juicer were running the show. Asset sales should help reduce this further, to the chagrin of Deloitte.
Trivia 4: The Board has dismissed compensation consultants Compensia – an action that deserves so much applause it would would bruise our hands. We feel this firm’s name should have been “Largessia.” The “consultants” at Compensia, more akin to hookers in office attire, would bless anything for a fee. Over the last several years, Compensation Chair Carlos “NACD-Decorated Horse Thief” Campbell, produced one ridiculously abusive pay scheme after another, all of which inordinately benefited Juicer and other PICO Executives. And all of them were endorsed by Compensia. If Compensia blessed those pay packages, its “professionals” would have blessed anything for a fee.
Show Bylinsky The Money!
We were displeased to learn that Greg Bylinsky, of Bandera Partners, has not been appointed to the Compensation Committee. We believe that compensation is the territory where large shareholders should roam.
One example: Mr. Webb and PICO CFO John “JP” Perri will be primarily responsible for calculating their own bonuses. The Compensation Committee will oversee and approve their work product. We feel this arrangement is structurally flawed – we don’t like the idea of two men with almost 40 years of combined institutional PICO knowledge tallying their own bonuses, to be supervised by three men with 3 years of combined institutional PICO knowledge. Given the information disparity, this sounds to us like a rigged game; we feel this pot is better distributed by men whose fortunes are more significantly affected.
Another example: how will the $10.5 million Juicer Termination Payment be categorized for bonus calculation purposes? We think it should be treated as an administrative expense. Messrs. Webb and Perri will surely disagree. To keep peace, Directors with minimal ownership will be tempted to side with the Executives. But Messrs. Speron and Bylinsky may not see things that way. These men’s limited partners own approximately 8.1% of PICO shares. The Juicer Termination Payment, on a pretax basis, will cost them $851,000.
The full Board will approve Executive Bonuses. But before that, the Compensation Committee will interpret and administer the calculations. Here is the operative sentence from the SEC filing:
The Plan will be administered by the Compensation Committee of the Board of Directors of the Company. The Committee will have the sole discretion and authority to administer and interpret the Plan, and the decisions of the Committee will in every case be final and binding on all persons having an interest in the Plan.“
We believe that both large shareholders should be members of the Compensation Committee, in order to “administer and interpret.”
PICO Stands Tall While UCP Cowers
Given the corporate governance improvements at PICO and the measures contained in the PICO 2017 Proxy, UCP occupies the deep moral low ground.
At PICO, changes implemented and poised to be implemented, represent modern best practices. At UCP, corporate governance is a sorry affair. Here are the examples of poor corporate governance and entrenchment at UCP:
A) Classified Board;
B) No stockholder action by written consent;
C) Directors removable by shareholders only for cause;
D) Special Meetings only called by Board, Chairman or CEO;
E) No cumulative voting; and
F) Potentially abusive preferred stock issuance.
PICO recently filed a 13D/A as majority investor in UCP. PICO makes 7 Proposals to improve corporate governance at UCP, all of which PICO has adopted itself. In other words, PICO isn’t asking UCP to do anything it has not already done.
PICO’s 7 Proposals for UCP should be included in the UCP Proxy Statement and endorsed by the UCP Board. If approved by UCP’s independent shareholders, UCP should adopt the 7 Proposals.
Anything less will be interpreted as entrenchment and breach of fiduciary duty.