'Just Vote No' Campaign Sends Board a Message

With just $137 million in annual sales and 6.8 million shares outstanding, MDT Corp. seems a small and unlikely target for shareholder activists.

Yet the Torrance-based maker of medical equipment sterilizers finds its directors facing a no-confidence vote--and by some heavyweight investors--at the firm's July 20 annual meeting.

The central characters in this battle are a 33-year-old upstart money manager and a well-entrenched chairman nearly twice his challenger's age. The fight also highlights an increasingly popular strategy among unhappy investors who want to send a strong message to corporate management but do not wish to oust those in charge--yet.

Andrew Shapiro, a San Francisco-based money manager who owns 2.3% of MDT's shares, fired off a letter to other shareholders July 1 asking them to withhold their votes for MDT's board as a sign of protest.

Shapiro contends that MDT has been floundering and that the six-man board of directors has been little more than a rubber stamp, in his words, on ineffective management.

Not surprisingly, MDT's co-founder and chairman, J. Miles Branagan, thinks Shapiro is wrong on all counts. Branagan argues that MDT's problems--slow-growing sales for the past two years and weak earnings for the past five--have largely been a function of health care reform fallout and MDT's digestion of a major acquisition in the late 1980s.

More important, insists Branagan, 61, his directors don't need a wake-up call from Shapiro. "Our board is way out front in this regard," Branagan said in reference to the need to redirect MDT and restore earnings growth.

But at least two other MDT shareholders, the California Public Employees Retirement System and the California State Teachers Retirement System, say they will join Shapiro in withholding their votes for MDT's board. Although both retirement funds are well-known as activist shareholders, it is still fairly rare for them to vote against management.

Shapiro, whose Lawndale Capital Management oversees $9.5 million for clients in two "hedge" funds, says he's new to the ranks of activist shareholders. He says he has owned MDT stock for five years and has watched the price fall from a peak of $15.13 in 1989 to $5 now as earnings have been erratic.

MDT had that peak performance in 1989, when it earned $4.3 million, or 83 cents a share. Since then, the company's best year has been fiscal 1993 (ended March 31 of that year), when it earned 38 cents a share. For the most recent fiscal year, earnings declined again, to $1.9 million, or 29 cents a share.

"I finally had to say enough is enough," Shapiro said, explaining his decision to oppose MDT's board. He contends that the ultimate blame for the stock's weakness must lie with the directors, who run the company on shareholders' behalf.

"My concern is that the board has been inactive and not diligent in exercising oversight of management," Shapiro said.

Yet he also admits that he does not have specific recommendations for re-energizing MDT. He notes that the company is one of the leaders in medical equipment sterilization and said the issue is not MDT's technology but its ability to translate its know-how into rising sales and earnings.

"I'm not seeking control or to put forth an alternate slate of directors," Shapiro said. Rather, he said, by withholding votes for the board, shareholders "can send a message to directors to get their act in gear."

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The idea of withholding votes at director elections has increasingly been embraced by shareholder activists who want to make a point about corporate performance.

Joseph A. Grundfest, a law professor at Stanford University and former member of the Securities and Exchange Commission, championed vote withholding in an April, 1993, article for the Stanford Law Review.

In "Just Vote No: A Minimalist Strategy for Dealing With Barbarians Inside the Gates," Grundfest said that withholding votes for directors will never be anything more than symbolic, because the nature of corporate board elections is such that victory for management is nearly always assured.

Nonetheless, Grundfest wrote, "symbols . . . have consequences. The resultant negative publicity can sharply reduce the prestige associated with serving on a target corporation's board, thereby providing an impetus for incumbent directors to improve corporate performance."

Branagan insists that MDT has been hamstrung for the past two years by the health care reform debate, which he said has frozen many potential buyers of MDT's medical sterilization equipment.

What's more, Branagan contends, MDT's and competitors' efforts to bring out new technology for medical equipment sterilization have been constrained by tighter federal regulation.

What about the 1989-to-1992 period, before health care reform efforts caught fire? Branagan concedes that MDT could have done a better job of a restructuring program it undertook in that period, after a major 1988 acquisition that overnight took the company from $12 million in annual sales to $70 million.

"In the execution, we could have done it better," he said. But he maintains that management always acted in what it believed was shareholders' best interests. And he notes that he and his family have 5.5% of MDT stock and thus a major stake in what happens.

As for the failed search for a chief operating officer, Branagan said "we talked to many candidates," but none met all of MDT's requirements. The search was called off six months ago.

Of Shapiro's vote-withholding campaign, Branagan said simply, "We respect their right to do what they've done." But he regards it as wasted effort, because he insists that MDT's board had already acted to improve the company's flagging results.

On Feb. 22, Branagan notes, MDT announced a hiring and pay freeze and said it would undertake a program to further control spending, cut inventory and lower the company's break-even point.

He said the company isn't for sale, but that "there are very significant and meaningful steps underway to accomplish the objectives" set forth in February. He declined to be specific but said the plan "will be announced in due course."

Shapiro, however, said he will continue to search for shareholder support in his "just vote no" campaign. Despite Branagan's efforts to convince him otherwise, Shapiro said, "this management needs to have a fire lit under them."

MDT's Stock History

Shares of Torrance-based MDT Corp., a maker of medical sterilization equipment, peaked in 1988 and have remained well below that high since. MDT share price, quarterly closes on Nasdaq, except latest:

FRIDAY: $5.00

Source: Bloomberg Business News

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