We appreciate the discussions that we have had with members of the Board and the management team over the past five months. As you may be aware, Ides Capital seeks to constructively engage with management teams and corporate boards to improve corporate governance practices and to implement changes that drive long-term value for the benefit of all shareholders. Accordingly, we wanted to write to you to formally outline our concerns as well as several recommendations that we believe would materially benefit Boingo's (NASDAQ:WIFI) corporate governance structure and, consequently, its shareholders.
On April 1st, Rob Longnecker and I spoke with Chuck Davis and Terry Jones of the Company's Nominating and Governance Committee. We appreciated the opportunity to speak with Chuck and Terry in order to more fully understand the nominating process, but disappointingly, we were ultimately left with an even greater concern that the Board appears largely unaware of and untroubled by its poor corporate governance practices. Understand that our perspective is shaped not only by our thorough review of the Company's corporate governance practices in combination with the new information we received from Chuck and Terry, but also by the dismal governance scores that the Company receives from Institutional Shareholder Services (NYSE:ISS).
We believe that the March 15, 2016, decision by ISS, a leading provider of corporate governance and responsible investment solutions for asset owners, to assign to Boingo a Governance QuickScore rating of 7, with 10 being the highest possible governance risk, speaks volumes in terms of the Company's "higher risk" corporate governance practices. It is worth noting that this score represents a deterioration from the prior ISS QuickScore. While management and the Board speak positively of Boingo's governance, we believe that "actions speak louder than words" and many of the actions taken by this Board lead us to believe that the current directors do not share our views on what constitutes sound corporate governance. Specifically, we are very concerned by:
1. The Board's decision, as we were informed by Chuck and Terry, early this year to appoint a seventh director to the Board within calendar year 2016 as opposed to a specific commitment to place a seventh director nominee on the proxy for the upcoming Annual Meeting of Shareholders. As you may be aware, we informed Dave Hagan (before being told of the intention to expand the Board) as well as the Nominating and Governance Committee members that we believe that the Boingo Board should be expanded to include a seventh director to avoid a split vote on a material matter and to augment the support that the Board provides to the Company. However, we strongly believe that the new director should be added to the Company's proxy as a matter to be decided by shareholders. If the Board fails to put a new nominee (constituting a seventh directorship) on this year's proxy and instead appoints such a director after the Annual Meeting, this would be yet another instance of what we believe is a troubling pattern: the Boingo Board repeatedly appoints new directors in a manner that skirts the appropriate process of allowing shareholders to vote on directors at the Annual Meeting. Specifically, the appointments of Michael Finley (August 2013) and Lance Rosenzweig (July 2014) each came less than two months after the relevant Annual Meetings. Additionally, Chuck Davis was appointed to the Board shortly after the Boingo IPO, as opposed to being disclosed in the Company's S-1 filings for review by prospective shareholders. Finally, the only time since the IPO that the Board filled a vacancy by placing a director nominee on the Company's proxy statement was the 2013 nomination of Terry Jones. While we would ordinarily view this nomination as a best practice procedurally, it is concerning that Terry Jones had a long-term directorship at EarthLink (NASDAQ:ELNK), which was founded by Sky Dayton (the founder and, at the time of Jones' nomination, Chairman of Boingo) and Mr. Jones and Mr. Dayton overlapped as directors of EarthLink from October 2003 through October 2008. In total, this combination of facts leads us to the conclusion that the Board regularly appoints directors for a trial run before allowing shareholders to decide the matter for themselves, with the sole exception being a case where the Boingo Chairman had a long-running prior relationship with the director nominee.
2. The Board's decision to maintain a staggered board, rather than allowing shareholders to elect every director at each Annual Meeting for a one-year term. Maintaining a staggered board materially impairs the influence of shareholders and, accordingly, leads to entrenched boardrooms and insulated management teams. It is worth noting that more than 85% of the companies in the S&P 500 have un-staggered boards, reflecting the desire of institutional shareholders that boards implement this measure of good corporate governance. This Board shows no interest in adopting this rapidly spreading best practice.
3. The Board's decision to combine the roles of CEO and Chairman into what is sometimes referred to as "the Imperial CEO", when Sky Dayton resigned from the Board in August 2014. We believe that combining these roles reflects an anachronistic approach to corporate governance and substantially weakens a key role of a board: to maintain a system of "checks and balances" that can ensure that a CEO does not have too much power at a company.
4. The Board's failure to diversify the boardroom - not only with respect to gender and multicultural diversity, but also with respect to age, operational experience and other relevant attributes and skill sets.
5. The Board's decision to base the CEO's performance-driven compensation overwhelmingly on revenue growth and to set what appears to be a very low hurdle rate for success on this metric.1
For all of the above reasons, we believe that this Board is not meeting the expectations of shareholders or governance experts in terms of implementing corporate governance best practices. We also believe that the Company is not meeting the financial performance expectations of shareholders, with a stock price that is down more than 40% since the IPO and three consecutive years of operating losses. Our experienced, well-qualified nominees would, we believe, be additive on both of these fronts. However, given all of the concerns we have outlined, we see no reason to feel assured that submitting our nominees into Boingo's "business as usual" nominating process, as has been the suggestion, will generate the result that we believe would best serve shareholders - an opportunity to refresh and augment the Boingo Board by electing new, independent directors at the 2016 Annual Meeting.
We, therefore, encourage the Board to immediately take the following steps towards improved governance:
1. Expand the Board to seven directors and allow shareholders the opportunity to vote on the expanded board at this year's Annual Meeting
2. De-stagger the Board, over time as each class comes up for election, limiting the prospective term of each director to the following year
3. Separate the roles of Chairman and CEO
4. Diversify the Board with respect to gender diversity, multicultural diversity and a diversity of backgrounds and skill sets
5. Create a management incentive structure that focuses more strongly on profitability and returns on invested capital
Finally, on April 4th, we had a call with CEO Dave Hagan and CFO Pete Hovenier, where we once again expressed our governance and performance concerns. During that call, we were surprised and disappointed to hear their opinion that, "for its size", Boingo's "governance is quite good". Given current trends in corporate governance best practices and the Company's ISS QuickScore, we strongly disagree and do not believe that the smaller size of a company justifies a "race to the bottom" with respect to corporate governance.
We urge the Board to take immediate steps to implement the measures that we have outlined and that we strongly believe will benefit all shareholders by augmenting the Board's accountability and positioning Boingo to drive long-term value. We remain hopeful that we can move forward constructively with the understanding, however, that in order to do so, it is critical that we see a demonstrable commitment by the Board to address its deficient governance practices.