Steve Bostic says he wasn’t out to pick a fight.
After selling his educational firm to Hoffman Estates-based Career Education Corp. in 2001, Bostic had a nice life, building a successful real estate development company, breeding champion boxer dogs and spending time on his boat, the Best in Show.
But Bostic, one of Career Education’s largest shareholders, with more than a million shares after the merger, became increasingly concerned with the performance and governance of the company, which had seen its stock price sink in recent months amid federal investigations and unflattering publicity.
Bostic, 61, spoke for several hours with company officials but said he wasn’t satisfied.
After talking with other shareholders, he said, he found out that many of them weren’t, either.
“What drove me over the edge,” he said in an interview, “was there was incredible shareholder sentiment … that said we can’t keep doing this.”
So Bostic launched a costly proxy fight against the firm, scoring a huge victory at the firm’s May 20 annual meeting, with three advisory resolutions on his proxy card receiving approval from roughly two-thirds of shares outstanding.
Most significant, about 62 percent of all shares outstanding supported his proposal to withhold votes from the three director nominees. Of shares actually voted, the percentage is closer to 70 percent, Bostic said.
“I think shareholders have spoken loudly and clearly,” he said.
Company officials said they agree, and they’re responding, although they say stockholders support the company’s current leadership overall.
By any measure, though, the outcome was remarkable: According to a study of 2,377 companies in the Russell 3000 by proxy advisory service Institutional Shareholder Services, only eight saw withheld votes of 50 percent or more in 2004.
`A pretty powerful message’
“It’s extraordinary,” said Gene Capello, a managing director of proxy advisory service Proxy Governance Inc.’s policy staff. “It really sends a pretty powerful message to the board and management in my opinion that something’s wrong and needs to change.”
Even before the vote totals were announced, the company said it would add two independent directors; evaluate Bostic’s proposals on the company’s poison pill anti-takeover defense and whether to elect directors annually; and review its governance practices generally.
Bostic, however, wasn’t satisfied.
“It’s not enough. You know that and I know that, and we must move on,” he told directors at the annual meeting, calling for the three re-elected directors to resign within 90 days.
Company officials disagree
From their conversations with shareholders, company officials insist that’s not what investors want.
“They are routinely expressing support for the measures the board and the company took,” said Janice Block, company senior vice president and general counsel. “They are satisfied the board is moving in the right direction. … They are not looking for specific resignations of board members.”
Although Proxy Governance recommended votes against the poison pill and annual election of directors proposals, Capello said a key move for Bostic’s success at the annual meeting was to include on his proxy card the two resolutions, which are perennially popular with many institutional shareholders.
“Mr. Bostic mounted a pretty able campaign,” Capello said. “Strategically, it was a very smart idea on his behalf to put those proposals up there. … I think those were wise choices on his part.”
If Bostic made a mistake, Capello said, it was in not putting forth a slate of director nominees himself, rather than simply focusing on the symbolic withheld votes for the incumbents, who were re-elected by receiving at least one vote.
“From his standpoint, he probably should have” proposed nominees himself, Capello said.
Given the result, he said, Bostic could have won election of his slate.
Bostic said he didn’t nominate candidates because late last year he was optimistic about the outcome of an investigation being conducted by a special committee of the board and outside counsel, and he was encouraged by his talks with major institutional investors about the company.
“My time came and went for filing a slate of alternatives to run against the board,” he said. “I wasn’t ready then.”
Independence early on
When Bostic graduated from Indiana University, he was ready to strike out on his own as an entrepreneur, buying a Burger Chef franchise before heading into a career in corporate America.
In 1981, he launched American Photo Group Corp., an innovative wholesale photo-processing company that ranked No. 1 in Inc. magazine’s 1987 list of the nation’s fastest-growing privately held companies. He sold it to Eastman Kodak Co. that year for undisclosed terms, but published estimates put the price at roughly $45 million.
Bostic developed a reputation as a disciplined, planning-oriented entrepreneur, going against the gambling, instinctive, shoot-from-the-hip stereotype.
In the mid-1990s, he acted on a passion for education reform, buying American InterContinental University’s campuses, whose programs included information technology, international business and multimedia communications.
At its core, he said his goal was to revamp learning into a collaborative environment to help students of all abilities reach their potential.
“We built schools to do that. It was remarkable. It was the neatest thing I’ve done in my life, by far,” Bostic said.
Providing students with a quality education, he said, is “a really worthwhile thing to do in your life. … The overwhelming thing on my end is I really want to see students get a great education.”
Firm’s health at sale disputed
Despite increasing revenue, the publicly traded parent company run by Bostic posted net losses of $18.2 million in 1999, including one-time items, and $5.5 million in the first nine months of 2000. That October, he agreed to sell to Career Education in a deal valued at more than $80 million, including assumed debt.
During the proxy fight, Career Education officials called the business “struggling” when they bought it and said they engineered a “dramatic turnaround.”
Bostic strongly disputes that, saying the situation was improving markedly when Career Education took over, though company spokesman Todd Hansen said “the facts just don’t indicate that.”
Bostic said he sold to bigger, growing Career Education to take the firm “on to an even higher level. … The merger opportunity looked to be very good on the surface.”
Career Education officials at the annual meeting stressed the success of American InterContinental under their leadership, as well as the company’s other units, citing in particular the firm’s overall growth in revenue and earnings.
During the proxy fight, they complained that Bostic “distorted facts” about the company’s performance. Bostic responded that Career Education officials chose their facts selectively to put the best face on the company’s results.
At the annual meeting, Chief Executive John Larson called 2004 “a great year in so many ways” and stressed the company was on track for 23 percent revenue growth, which would put it over $2 billion in annual revenue, and a more than 33 percent increase in earnings per share.
“We are well-positioned for the future,” he said.
The company, however, has been dogged by investigations by the Justice Department and Securities and Exchange Commission, and several civil suits. Many allegations cover claims that the firm inflated student enrollment figures and mismanaged federal student aid.
Stock has slumped
Career Education’s stock price is down more than 50 percent from its all-time high of nearly $71 a share last year.
That has cost Bostic millions, but he said he believes his proxy fight, which has cost him about $500,000, may be a terrific investment if it helps turn the company around.
“I missed eight weeks out of my life that I can’t replace, but something needed to be done,” he said. “I think it’s going to be worth the fight.”
The proxy vote outcome, he said, is a mandate for change.
“We’re going to try to build on that and we’re going to try to build on this in a positive way,” Bostic said.
Company officials have expressed similar goals.
“We have heard our stockholders’ concerns and are committed to becoming a corporate governance leader,” Larson said in a statement last week, adding the company has talked to shareholders and has received “a great deal of positive feedback” about its performance and leadership.
Shareholder survey planned
Bostic said he has had talks with roughly half of Career Education’s shareholders since the annual meeting, and he is getting a different message. He plans a survey of shareholders to solicit their views, and he sent a letter to Larson last week outlining where he thinks the company should go from here, including his plan to propose five new director candidates.
Investors have suggested several potential high-quality directors, he said.
Company officials said they welcome Bostic’s recommendations as they search for people to fill the openings on the board.
Bostic called the overall situation a “moment of truth” for the company.
“I’d like to lead the charge for progress and work with them to make it work, because I know it can work,” he said.
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acountryman@tribune.com
