Thursday, 30 June 2011

CSC's idea of pay for performance (That is to say, pay the chief exec more while shareholders, staff, and customers get less.)

CSC issued its FY2011 Proxy Statement to Shareholders last week in preparation for its Annual Meeting in August. It reports that the cosy clique of 8 non-executive directors who have presided over the steady decline of CSC together with CEO Michael W Laphen since 2007 are all putting themselves up for re-election. Clearly none of these directors feels sufficiently accountable for their contribution to CSC's current situation to offer their resignation. Erik Brynjolfsson, who was nominated to the Board in December 2010, is also seeking re-election.

The Proxy Statement gives details of the compensation of CSC's top executives,Messrs Laphen, Mancuso, Cook, Owens and Sheaffer. The Statement is exemplary in its transparency with full disclosure of executive compensation and their performance against the company's key financial targets.

Mr Laphen's FY2011 total compensation was $12.5 million, down from FY2010's $15.5million. It is still a remarkable reward for non-performance. Here’s why. CSC's share price has declined by 22% since June 2010, while the Dow Jones Index has increased by 17.5% and Accenture's share price rose by 40%. In other words, a $1000 investment made a year ago in Accenture is today worth $1400; a simple Dow tracker investment would be worth some $1175. In contrast, the $1000 invested in CSC a year ago would be worth $780. This is the level of relative poor performance we are dealing with regarding CSC. Note that Accenture shares are double the value of CSC’s for the same period.

Here are some of the surprising elements in Mr Laphen's FY2011 compensation:

a) Fixed base salary was increased by 7% to $1,125,000 this year to put him "at the median of the market". Why? His performance is below the median of the market.

b) Long Term Incentive compensation (LTI) target increased in FY2011 FY2011 from 700% to 750% of his base salary, an increase of over $550,000 per year. This was in recognition of his "strong FY2010 performance". What strong FY2010 performance is this? There was a 3% year-on-year revenue decline and $90mln of accounting irregularities.

c) The bonus included over $600,000 for having achieved revenue growth of only 1.2% in FY2011 (after inflation that is not growth but shrinkage).

You will now see that Mr Laphen's compensation package is based solely on achieving financial numbers. It ignores building a sound business, growing customer satisfaction or anything that could be considered as strategic. There are two problems with this, irrespective of whether he deserves the total amount he receives. Firstly, he receives by default bonuses at 75% or 80% of budgeted financial achievement. This is truly reward for failure because he would still get a bonus even if CSC suffered a catastrophic 15% drop in total revenue.

But more importantly and as indicated above, the CEO compensation does not take account of non-financial impacts. Some of the critical events for CSC impacting or arising from FY2011 do not directly enter the pay calculation, e.g.:
a) Major accounting irregularities remaining undetected for so long in Nordic

b) Mr Laphen and CFO Michael Mancuso being unable to certify to the SEC that CSC's financial records were reliable

c) The SEC investigation and the CSC Audit Committee investigation into the MSS irregularities

d) The flawed communication of the Q4 financial results, resulting in two profit warnings, the second one given 5 weeks after the end of the quarter while CSC still failed to meet the analyst consensus.

e) The class action lawsuit and long-term-investor investigation.

f) A stock buyback program which has wasted $13million in just 3 months, being fully 20% of the cost to CSC of the shares bought.

g) The NHS project issues in the UK. The damage the project has done to CSC's reputation and the poor image CSC gave of itself testifying at the UK parliament's Public Accounts Select Committee. Also Mr David Cameron the Prime Minister of the UK, leader of one of the top ten economies in the world is declaring that no new contracts will be signed with CSC.

h) The view expressed in the Wall St Journal that CSC has got itself into a poor market position and that it is being caught by its lack of earlier investment

As CEO, Mr Laphen needs to be address issues such as those above, and particularly build a long-term future for CSC. But his "financial only" compensation and bonus criteria may tell us why he spends so much time micro-managing "the current quarter".

The CSC Compensating Committee's stated objective is to "align pay with operating performance and increases in shareholder value". A remuneration package of $12.5million for Mr Laphen is not pay for performance in view of what has happened at CSC. It is reward for failure. The Compensation Committee need to go back to the drawing board and redesign the CEO compensation criteria.

In view of the losses borne by his shareholders. Mr Laphen should voluntarily waive this year's bonuses . Other CEO's have done this. Some have been fired for lesser failings. As an example see what has happened to the CEO of Cable & Wireless. Will Mr Laphen do this? It seems very doubtful.

If you ever wondered how much Mr Laphen's compensation would be on change of control of CSC, e.g. if CSC was acquired, the SEC Proxy Statement tells us. Subject to certain conditions Mr Laphen's payoff is estimated at up to $38million. Yes, that is thirty-eight million dollars. What motivation could that kind of pay-off create in any person?

Full details of the Proxy Statement can be found on http://assets1.csc.com/investor_relations/downloads/2011_Proxy.pdf

In conclusion, while Mr Laphen's rewards are some 180% higher than when he became CEO in 2007, shareholders have seen a decline in their investment of 35% during that period, while peer companies like Accenture, Serco, IBM have continued to achieve profitable growth. The non-executive directors are paid to look after the interests of the shareholders. When one looks at what has happened to the share price and Mr Laphen's compensation over these 4 years, whose interests does it look like the non-exec directors on the Compensation Committee are really looking after?

posted by Littlejohn and Will Scarlet

Tuesday, 21 June 2011

CSC share Buy Back Program: A waste of money?

CSC share buyback program - value for money??

CSC's 10K report disclosed that under its buyback program CSC bought 1,353,000 shares for a total cost of $65million in Q4 FY11. The average price was $48.01 per share

At today's price of around $38.50, all those shares could have been bought for $52million. So CSC has wasted so far about $13million of its shareholders' money.

As a CSC shareholder, I would have preferred to see these $13million invested in ensuring the company had a Finance organization which was fit for purpose. There could have been an excellent return on investment already by having avoided $91million of accounting irregularities in Nordic.

CSC's Nordic accounting irregularities reach $91million, but key questions remain

CSC filed its FY2011 10K Annual Report with the SEC on June 16.

It told us that

a) the Nordic accounting irregularities overstated FY2010 profit by a massive $91million,

b) most of the irregularities were expenses inappropriately capitalized as "Deferred contract costs"

c) substantially all the irregularities happened in FY2010


The irregularities were written off over the 4 quarters of FY2011, but some questions remain unanswered:


1. How could CSC Corporate management fail to notice irregularities which inflated profit by $91million in a small Region with an annual profit target of around $40million?.


A likely scenario is that the irregularities were needed to make Nordic look as if it had achieved its profit target. This would mean CSC Nordic in reality made a loss of $51million, but was reporting to Corporate a profit of $40million. How can a European or Corporate executive overseeing Nordic not be aware that a small Region was in reality missing its profit target by over $90million.? Yet CSC European HQ and Corporate apparently failed to notice anything unusual in Nordic's reported numbers! Curious indeed!!

2. What could have driven two experienced and trusted CSC executives to do what they did?

The 10K Report implies that the Nordic Chief Operating Officer (COO) and the Nordic Chief Financial Officer (CFO) are suspected of being at the center of the irregularities. Both were expatriates handpicked by CSC and sent from CSC UK to manage the Nordic business. The COO, the highest ranking CSC executive in Nordic, was a 20 year CSC veteran with a consistently good performance record.

Has CSC asked itself what could possibly drive trusted executives who were put on special expatriate assignment to the region to act in this way? Could they have "cracked" under unrelenting pressure from CSC Corporate to achieve the impossible profit targets which had been imposed on them?

3 What actions, if any, has CSC taken to remedy the Finance managerial shortcomings which the Nordic episode has highlighted?


Fully six months after CSC CFO Michael Mancuso told analysts and investors that the Nordic problems were fixed, CSC's Audit Committee showed how much confidence they had in that statement by instigating an independent investigation in May 2011.


CSC remedial measures in Nordic included the termination, resignation or redeployment of over half of the local finance staff. These employees are paying a high price for the actions of the management which CSC selected. But what is CSC doing to address the Europe and Corporate Finance management errors and failures which allowed the Nordic irregularities to go undetected for so long?

These errors and failures include:

a) Dismantling the European Headquarters Finance group which undertook critical Corporate oversight activities to save costs some 2 or 3 years ago.

b) CSC's inability to retain senior finance staff
in Europe over the past years.

c) Basic Controllership disciplines like account reconciliations and balance sheet reviews becoming so inadequate that CEO Michael W Laphen and CFO Michael J Mancuso felt unable to certify the integrity of CSC's financial statements for part of FY2011.

But unlike half of the Nordic finance staff, the European and Corporate executives responsible for these errors and failures escape accountability and carry on.

The full 100 page FY2011 SEC 10K report can be viewed at:
http://quote.morningstar.com/stock-filing/Annual-Report/2011/4/1/t.aspx?t=XNYS:CSC&ft=10-K&d=666df9bd81b04b6a8af29ea715dabadc

Monday, 13 June 2011

A business rationale for avoiding CSC shares

CSC European executives had an uncomfortable time last week, as they were berated for the company's poor financial performance. CEO Michael W Laphen has demanded more effort and commitment from managers and employees. As if CSC's problems have been caused by lack of effort from employees and managers with financial targets they do not believe in!

This approach of "berating the staff and assigning targets" has become the standard approach to profitability challenges at CSC. Its continual use has demoralized staff and helped get CSC into the difficulties it is struggling with today. Reinforcing this approach in the current environment will simply create more of the same unsatisfactory outcomes for CSC.

Despite all its difficulties, some market analysts continue saying CSC's stock is undervalued. They cite its book value per share, its cash flow, dividend yield, interest coverage and debt/equity ratio as the bases of their opinions. But Rolfe Winkler, writing in the Wall Street Journal, has looked at CSC's business dynamics as his rationale for recommending that investors avoid CSC shares. He gives CSC's poor market positioning, its failure to invest and potential consequences of its accounting irregularities among his reasons.

Here is a link to his article, which is well worth reading:
http://online.wsj.com/article_email/SB10001424052702304778304576377722954582048-lMyQjAxMTAxMDEwMzExNDMyWj.html


Cassandra agrees with Mr Winkler's opinion that CSC shares are best avoided. CSC has failed to act on changing market conditions in recent years. It has also consistently curtailed market, service offering and technology investments and sacrificed sales opportunities to shore up "this quarter's profit".

I strongly recommend Mr Winkler's article to CSC's Board of Directors. Clear and coherent action on the issues he raises will do more to restore CSC's long-term health than continually beating on employees and managers as if they were the major problem of the company. .

Posted by Littlejohn

Thursday, 9 June 2011

Yet another class action lawsuit filed against CSC

The law firm of Izard Nobel LLP, announced on June 8 that a class action lawsuit has been filed against CSC on behalf of purchasers of CSC shares between August 11, 2010 and May 25, 2011.


It alleges that CSC and certain of its officers and directors violated US federal securities laws. Specifically, they failed to disclose the following facts:

historical and current financial results from the Managed Services Sector ...were false and in violation of the Company's internal accounting policies and Generally Accepted Accounting Principles;

the implementation of the Company's Lorenzo 1.9 software at the United Kingdom's National Health Service was experiencing severe technical difficulties, making CSC unable to meet its customer contract milestones such that that the entire contract was at risk of termination; and

CSC was experiencing significant weakness in demand for its products and services, and bookings for new business for its products were declining.

More details can be seen on http://www.izardnobel.com/computersciencescorporation/


It just gets worse and worse at CSC

Wednesday, 8 June 2011

Another legal challenge for CSC

Robbins Umeda LLP, a shareholder rights litigation firm, has launched an investigation into whether the directors and officers of CSC breached their fiduciary duties to shareholders by causing or permitting the company to issue false and/or misleading statements regarding the company's business and financial conditions. Here is a link to more details:

http://www.businesswire.com/news/home/20110607006930/en/Robbins-Umeda-LLP-Announces-Investigation-Computer-Sciences


This comes on top of the class action lawsuit and Securities Law violation allegations against Michael W Laphen (CEO) and Michael J Mancuso (CFO) on behalf of investors who bought CSC shares in the period between 11 August 2010 and 25 May 2011. This lawsuit is covered in the June 5 and June 7 postings on this Cassandra blog.

The investigation by Robbins Ulmeda LLP, depending upon its outcome, could potentially lead to more litigation, this time on behalf of all investors who were CSC shareholders during the period in question.

What a mess!!

posted by Littlejohn

Tuesday, 7 June 2011

A copy of the CSC class action papers here

http://www.rgrdlaw.com/cases/computersciences/complaint.pdf

Sunday, 5 June 2011

Just when you thought things couldn't get any worse at CSC......

A class action lawsuit was filed against CSC by the law firm of Robbins, Geller Rudman & Dowd LLP on June 3. It seeks to recover damages on behalf of all purchasers of CSC common stock during the period 11 August 2010 and 25 May 2011. .

The lawsuit alleges that during this period:
1. CSC and certain of its officers and directors made false and misleading statements about the Company’s financial condition and prospects
2. CSC failed to disclose the true facts, or the facts were recklessly disregarded
3. there was no reasonable basis for the fiscal 2011 revenue, earnings, bookings and margin forecasts
4. as a result, CSC stock traded at artificially inflated prices, reaching a high of $56.54 per share.
Full details of the complaint can be found on http://eon.businesswire.com/news/eon/20110603006045/en .

The past weeks have been difficult for CSC, with two profit warnings, disappointing Q4 FY11 results, the NHS project issues, the accounting irregularities in Nordic (and Managed Services?) and then on June 1 the major strike at CSC Denmark. Now this class action law suit.

What will their next surprise be?

posted by Littlejohn