Are CSC's non-executive directors doing their job?
Are CSC’s non-executives looking out for the interests of the shareholders, which is what they should be doing, particularly when the company is struggling? Or are they just going along with whatever the CSC executives want?
Look at what has happened in CSC in some of the major areas of responsibility of the non-executive directors’:
• Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.
What is CSC's strategy? CSC insiders may know, but it is not clear to the outside world. And whatever CSC’s strategy is, the results over the past 3 or 4 years suggest it has not been successful. So what are the non-execs doing about it?
Why does cost reduction seem to be CSC management’s major focus area? Is it because they do not know how to grow the business so have retreated to their comfort zone of expense cutting? Cost cutting will not buy CSC success, but it can buy time to fix operating problems and revitalize the revenue generation machine. Today CSC’s problems seem to be increasing and the revenue generation is still stalled. Why does CSC use its cash on ill-advised stock buybacks rather than investing in the business? In short, does CSC have a direction?
(By the way, would CSC tell the shareholders the financial loss incurred on these buybacks compared to the current share price of circa $49?).
• Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives .
Looking at CSC's performance over the past 5 years, it is inconceivable that they have met their objectives and financial targets. The financial results have been consistently disappointing, particularly the revenue. So what are the non-executive directors doing about this problem? CSC management tell shareholders and employees that the disappointing results are due to external factors, one-off problem projects, market softness and individual rogue executives in Nordic who invent $80million of non-existent profits before the CSC management notices it. Do the CSC non-executive directors really believe this? Do they not wonder why such problems appear to be more acute in CSC than in its competitors? Do they not notice that there is no improvement in the trends? Do they ever think that current CSC executive management might also be part of the problem?
• Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
The Nordic accounting problem demonstrates that the financial controls were not sufficiently robust and thus the financial information was certainly not accurate. It begs the question of the extent to which these problems are related to CSC's apparent inability to retain senior finance staff in Europe. Or maybe related to its decision 3 or 4 years ago to run down the European finance function? Have the non-executives tried to get a first-hand view of the underlying causes of what happened in Nordic? Have they spoken directly to any of the former employees directly involved in the matter? Have they directly investigated this failure of CSC’s Corporate governance and demanded to know why CSC’s finance organization did not notice anything was wrong until the problem reached $80m? The Corporate governance problem is very concerning. With such weak financial controls, how can one be sure there are no similar Nordic-like accounting issues elsewhere in CSC which have not been discovered?.
• People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors.
The judgement of the non-executives must be strongly questioned here. When Mr Laphen assumed his CEO role in July 2007, his annual remuneration was $4.5million. CSC stock price reached $60 per share that month. Today the share price hovers around $48, giving a loss of some 20% for the shareholders over that period. But Mr Laphen did not take a 20% reduction in pay to mirror the losses borne by the shareholders. His remuneration for 2010 was $15.5million (source: morningstar.com), an increase of 240% compared to 2007!
Does this seem sensible and right to the shareholder who has suffered a 20% loss? Does this motivate and energize the CSC employees who have experienced pay cuts, pay freezes and cancellation of their bonuses “to maintain the company’s profitability?” The top management of a company should lead by example, not by applying different standards for their own benefit. Why did the non-executive directors not make Mr Laphen apply to himself what he applied to the organization?
In summary, there must be strong doubts about CSC’s plans, strategy and performance. As noted above, there are significant challenges in all the areas the non-executive directors should focus on. So are they doing their job and developing Plan B? Or are they just rubber-stamping the decisions and actions of the CSC executives? Time will tell, but with few performance improvements in sight how much time should they be given?
For the record these are directors, average age 64, who seem happy with CSC's pathetic performance:-
Are their own companies performing like this?
Board of Directors
The Board is currently comprised of the following ten directors:
Irving W. Bailey, II
Senior Advisor, since 2005, and Managing Director, from 2001 to 2005, of Chrysalis Ventures, LLC, a private equity fund. Former Chairman and Chief Executive Officer of Providian Corporation, retired as of 1997. Mr. Bailey is also Vice Chairman and a director of AEGON N.V. and a director of Hospira, Inc. He has been a director of CSC since 1992. Age 69.
David J. Barram
Chairman, since 2007, and Chief Executive Officer, from 2006 to 2007, of Mobibucks Corporation, a provider of an alternate payment system and electronic loyalty card and coupon system. Former Administrator of the U.S. General Services Administration, retired as of 2000. He has been a director since 2004. Age 66.
Stephen L. Baum
Former Chairman of Sempra Energy, a publicly held energy-services company, retired as of January 2006. Prior thereto, Chairman and Chief Executive Officer of Sempra Energy from 2000 to 2005, and President from 2000 to 2004. Mr. Baum is also a director of TransAlta Corporation. He has been a director of CSC since 1999. Age 69.
Director of the MIT Center for Digital Business since 2002, the Schussel Family Professor at the MIT Sloan School since 2001, Research Associate at the National Bureau of Economic Research since 2006 and the Chairman of the MIT Sloan Management Review since 2007. He lectures worldwide on technology strategy, productivity and intangible assets. He has been a director since 2010. Age 48.
Rodney F. Chase
Chairman, since 2005, of Petrofac Ltd., a provider of facilities solutions to the oil and gas industry. Senior Advisor, since 2003, to Lehman Brothers, an investment bank. Former Deputy Group Chief Executive and Managing Director, from 1992 to 2003, of BP p.l.c., an oil and gas company. Mr. Chase is also Deputy Chairman of Tesco p.l.c. and a director of Nalco Company and Tesoro Corporation. He has been a director of CSC since 2001. Age 67.
Judith R. Haberkorn
Retired President of Consumer Sales and Service, Verizon Communications (formerly Bell Atlantic), provider of broadband, wireline and wireless Communications for business, government and consumers, from 1998 to 2000. Ms. Haberkorn is also the director of Armstrong World Industries, and a Express Jet Holdings. She has been a director of CSC since November 2007. Age 63.
Michael W. Laphen
Chairman of the Company since July 2007, and President and Chief Executive Officer since May 2007. President and Chief Operating Officer from 2003 to May 2007, Corporate Vice President from August 2001 to April 2003, and President of the European Group from August 2000 to March 2003. He has been a director of CSC since February 2007. Age 59.
F. Warren McFarlan
Professor, Harvard University, Graduate School of Business Administration since 1973. T.J. Dermot Dunphy Baker Foundation Professor since 2004. Senior Associate Dean and Director of Harvard's Asia-Pacific Initiative from 2000 to 2004. Professor McFarlan is also a director of Li & Fung Limited and INVESTools Inc. He has been a director of CSC since 1989. Age 72.
Chong Sup Park
Former Chairman and CEO of Maxtor Corporation from November 2004 to May 2006, prior to its acquisition by Seagate Technology, a manufacturer and designer of hard disk drives. Director of Maxtor Corporation from February 1994 to May 2006 and director of Seagate Technology since May 2006. Dr. Park is also a director of Brooks Automation, Inc., Smart Modular Technologies Inc. and Ballard Power Systems Inc. He has been a director of CSC since July 2007. Age 62.
Thomas H. Patrick
Chairman, since 2004, of New Vernon Capital LLC, a private equity fund. Former Executive Vice Chairman, Finance and Administration, from 2002 to 2003, and Executive Vice President and Chief Financial Officer, from 2000 to 2002, of Merrill Lynch & Co., Inc., an investment banking and securities brokerage. Mr. Patrick is also a director of Deere & Company and Baldwin & Lyons, Inc. He has been a director of CSC since 2004. Age 66.
Mike Laphen is our Chairman, President and CEO. The Board has determined that each of the remaining nine directors — Irving Bailey, David Barram, Stephen Baum, Erik Brynjolfsson, Rodney Chase, Warren McFarlan, Judith Haberkorn, Chong Sup Park and Thomas Patrick — are independent, for purposes of CSC's Corporate Governance Guidelines.