Ephraim Fields of Echo Lake Capital has issued another letter to the independent board members of Edgewater Technology, Inc. (NASDAQ: EDGW) ("EDGW", "Edgewater", or the "Company"). While his letter raises serious questions about Edgewater, it also serves as a reminder to shareholders of all companies that they should be cognizant of the backgrounds and incentives of a company's board of directors. The board of any company has a fiduciary responsibility to act in the best interests of all shareholders, but when the directors do not have the requisite skills and financial incentives, the company's stock price may dramatically underperform.
Fields' previous letters have detailed his concerns that Edgewater's stock has dramatically underperformed, that its directors are overly compensated, and that the directors' incentives are not aligned with those of all shareholders. In his latest letter, Fields takes a detailed look at the background of the Company's independent board members, and what he finds is disconcerting. I encourage you to read his letter, but to summarize, Fields raises serious questions about each board member's qualifications.
Fields says the following about the independent board members: "After researching your backgrounds, we became deeply concerned because:
- Most of you lack experience in industries that are relevant to EDGW. Amazingly, almost all of you have had careers in the non-profit or marketing industries, and we wonder how helpful that experience is in guiding a for-profit, IT consulting company like EDGW.
- Collectively you appear to lack many skills critical to a well-functioning board including accounting, capital allocation, corporate finance, M&A, and strategic planning.
- It appears that several of your previous companies did not perform well under your leadership.
- Your average tenure on the Board is almost nine years, which suggests that, despite EDGW's historically poor performance, little effort has been made to recruit new directors who could add value to the Company.
- Most of you have never served on the board of another publicly traded company. This is alarming because it suggests you may lack a basic understanding of how other public company boards function and how to best fulfill your fiduciary responsibility.
- The two of you who do serve on the boards of other public companies both sit on the board of the same company. We often find such (unnecessary) board interlocking to be a sign of poor corporate governance and reflective of an "old boy's network," neither of which are good for EDGW shareholders."
Fields clearly believes that Edgewater's independent board members lack the skills necessary to create long-term shareholder value. His letter makes a compelling case, and raises legitimate concerns regarding whether these individuals are really best suited to serve as Edgewater's directors.
Fields also criticizes Edgewater's CEO, Ms. Shirley Singleton, and asks "how many other CEOs keep their jobs and get increased compensation after almost 12 years of repeated underperformance?" Fields states that since Ms. Singleton became CEO almost 12 years ago "EDGW's stock has returned only 50%, while the S&P 500 has returned 83%, implying EDGW shareholders would have made almost 70% more money (and benefited from significantly greater liquidity) by investing in the S&P 500 instead of Ms. Singleton."
Fields also warns the Edgewater board against making another acquisition by detailing its lack of success with prior M&A activity. In his letter, Fields says "Finally, we caution you not to use EDGW's capital for an acquisition. You and senior management have proven to be highly inefficient at operating EDGW, so we have no reason to believe you will be more successful running an even larger company. Furthermore, acquisitions are inherently risky and we question your ability to identify and due diligence appropriate acquisition targets, especially since six months after you purchased Fullscope, you discovered fraud and embezzlement at the company. EDGW shareholders should ask themselves (I) why you failed to discover this fraud during due diligence and before the acquisition closed, (ii) whether EDGW overpaid for the acquisition in light of the subsequently discovered fraud, and (III) whether EDGW will ever recover the millions of dollars that have been spent trying to recoup the embezzled money."
Considering the long-term underperformance of Edgewater's stock, as well as its board of directors' actions (or lack thereof) during this period, shareholders should think long and hard about supporting this group of individuals in the future.