Argo defends CEO Watson after scathing attack by shareholder Voce Capital

The board of the Argo Group has described a letter by Voce Capital Management, a shareholder in the company, which heavily criticises Argo’s performance and leadership, as misleading, inaccurate and a “personal attack” on its chief executive Mark Watson III.

The comprehensive almost 7,000-word letter, made public on Monday February 25, makes four main points about the company’s performance but also goes into extraordinary detail about the personal life of Watson including quoting extensively from his personal website.

There is “no demarcation between Mr. Watson’s personal activities and those he directs Argo to do,” the letter claims. It also states: “We’re deeply concerned that Mr. Watson’s hobbies, pet projects and the cult of personality he apparently wishes to create for himself have commandeered and corrupted Argo’s priorities.”

The letter starts by calling for an improvement in the company’s return on equity (ROE). “The only pathway for Argo to create sustainable, long-term shareholder value is through a dramatic improvement in its return on equity,” it states. But adds: “Argo will never be able to meaningfully enhance its ROE with its current strategy and expense structure.”

It then goes into great detail as it criticises Argo’s alleged high expense structure. “Argo’s corporate expenses are not only shockingly high – they are also shockingly inappropriate, including extravagant perquisites, personal use of corporate property such as Company-owned aircraft and housing, gross misallocations of capital on wasteful items and frivolous vanity sponsorships, and an overall spendthrift culture that misdirects Company assets to support the lifestyle and hobbies of the Company’s CEO at the expense of shareholders,” the letter states.

It also denounces what it calls the company’s “lack of independence, dearth of relevant experience and misalignment with shareholders.” It adds: “Argo’s Board of Directors is directly responsible for this waste of corporate assets and must be held accountable for it,” it says.

To solve these issues, it suggests change, starting with it nominating four independent director candidates to the Argo board.

In a robust response to the letter, the board of Argo confirmed the receipt of Voce’s director nomination notice but also looked to dispel many of the allegations made by Voce.

“Argo’s board of directors and management welcome input from all our shareholders and take into account their views. In that spirit, we were looking forward to continuing our dialogue with Voce, but are disappointed that Voce has decided not to engage us constructively. Instead, Voce has sent a letter to shareholders that contains a number of misleading and inaccurate statements and personally attacks the company’s CEO, ignoring Argo’s track record of strong value creation for all shareholders,” it stated.

The letter highlighted the company’s one, three and five-year period total shareholder returns of 39 percent, 69 percent and 136 percent, respectively. The company also returned in excess of $645 million of capital to shareholders from 2010 to 2018, it stated.

It also noted that its margins are improving and that in 2018 it lowered its expense ratio by 260 basis points to 37.8 percent. “The improving expense ratio, along with strong execution of the company’s strategy, is contributing to the achievement of the company-stated long-term ROE target of 700 basis points above the risk-free rate,” it said.

Defending Watson, the company argued that the interests of the company’s CEO and board are aligned with all shareholders. “The CEO is the largest individual shareholder, and the board and executive officers as a group own beneficially approximately 4.9 percent of the company’s shares outstanding. In addition, the company has a strong and diverse group of independent directors, including five new directors who have been added to the board over the past two years,” it said.

“The board’s Nominating and Corporate Governance Committee will review Voce’s nomination notice and proposed nominees in accordance with its fiduciary duties under applicable law and the company’s corporate governance guidelines. The board will present its formal recommendation regarding director nominees in the company’s definitive proxy statement and other materials, which will be filed with the Securities and Exchange Commission and mailed to all shareholders eligible to vote at the 2019 Annual General Meeting. The company has not yet scheduled its 2019 Annual General Meeting. Argo shareholders are not required to take any action at this time.”

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