Capstone Turbine: Close, But No Cigar

| About: Capstone Turbine (CPST)

The origin of the phrase "close, but no cigar" has questionable roots, although one idea is that it originated in the mid-19th century when cigars were given as prizes at carnivals. When someone failed to win a prize, the carnival barker would use the phrase. Sometimes shareholder meetings have a carnival atmosphere, and Capstone Turbine (NASDAQ:CPST) shareholders came close to winning that cigar at the company's annual meeting.

After the required business took place - election of directors and proposal voting - there was a long sales pitch and Q&A session led by CEO Darren Jamison, making excuses for why a variety of goals had not been achieved. It was followed by a pair of questions that were answered by Capstone Chairman, Gary Simon. One of these questions was about executive compensation, a topic I had written about previously. The question was about how the board could justify any management bonuses until sustained profitability had been reached. Part of Simon's answer was:

The board sets the management compensation plan and their incentives. So let me say this simply, and then give you some explanation, a decision was made by this board some years ago that the mice need to smell the cheese.

Aside from comparing the management team to mice needing to smell cheese, the justification was that progress was being made toward profitability - profitability that always seems to be a year or two away. In my previous article I wrote that:

Although I consider it a futile exercise, I routinely vote against the "ADVISORY VOTE ON THE COMPENSATION OF THE COMPANY'S NAMED EXECUTIVE OFFICERS AS PRESENTED IN THE PROXY STATEMENT." And, since the Directors structure the compensation plans and are recommending that shareholders vote in favor of the pay packages, I also routinely withhold my vote for all the directors.

It is a rare occasion to see executive compensation packages voted down by shareholders, directors failing to get elected or the auditors failing to be approved. Capstone's vote was no different. Voter "turnout" was light, with the directors each receiving approximately 76-78 million votes for, 4-6 million votes abstained and 151 million "broker non-votes." The vote for the auditors was 221 million in favor, 8 million against and 5 million abstaining. (Note that voting to approve the selection of auditors is considered a routine matter. Certain brokers will vote those shares, for which no proxy directions have been received, for the approval of the selection of auditors.)

So why the title of the article? Because the executive compensation was approved by a very slim margin:




Broker Non-Votes

Executive Compensation Plan Criteria





Compensation for Named Executives





I confess to being puzzled by the disconnect between the above results. Shareholders that chose to vote on the issue - approximately one in four of the more than 300 million shares outstanding eligible to vote - voted seven to one in favor of the compensation plan, but barely approved the pay packages that the same plan generated. And they voted more than ten to one in favor of the directors that put together the plan and recommended and approved the compensation.

Advisory votes on compensation structure and the specific compensation plans for executives are routinely approved by shareholders, regardless of how well or how poorly these executives have performed. And, since the vote for executive compensation is only "advisory," its importance is dubious.


It is unfortunate that shareholders care so little about their investment in Capstone that nearly three quarters of them don't bother to vote. Perhaps if a few more had cared enough to vote on the pay packages, a clear message would have been sent to the compensation committee and the board of directors. As the carnival barker would say, "Close, but no cigar."

Disclosure: I am long CPST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have shares that I consider part of a long-term hold as well as shares that I consider part of a trading position that I may sell at any time.