Quality Systems Inc., an Irvine healthcare software company, is set this week to learn if it’s getting up to three new independent directors after a dissident shareholder and director made another challenge to its management.
Ahmed Hussein, an Egyptian businessman who owns some 17% of Quality, put forth a slate of himself and five others for Quality’s board in July.
He says the software maker needs new governance practices, a strategy to increase returns for shareholders and a board that’s not so closely allied to Sheldon Razin, Quality’s founder and chairman.
The fight is unfolding as new Quality Chief Executive Steven Plochocki takes over and is acclimating himself.
“Last week, I was out on the East Coast, Boston, Washington and Philadelphia meeting with the investment community and meeting with the proxy governance groups,” Plochocki said.
After those meetings, RiskMetrics Group Inc., Proxy Governance Inc. and Glass, Lewis & Co., three leading shareholder advisory groups, issued statements in support of Quality’s management and its board.
“I spent most of my last week on the job talking to proxy people,” Plochocki said. “I would have much rather been out visiting all my sites, getting to know management and starting to move the company forward.”
Plochocki is a longtime Orange County health executive who replaced Lou Silverman last month in the top job. He’s been a Quality director for four years.
Quality is due to elect directors at its annual shareholders’ meeting, which takes place Thursday in Costa Mesa. The company’s management has put together a slate of founder Razin, Plochocki, three other incumbent directors and three newcomers.
As for Hussein, he is sticking to his guns, although he said he is realistic about the latest board showdown:
“I expect that we will not elect as many directors as I would like,” Hussein said, alluding to the proxy groups’ endorsements.
“But I’m hoping that the institutional owners recognized the value of what I’m saying,” Hussein said. “I see the potential in Quality Systems.”
The company’s software for automating the offices of doctors and dentists can help eliminate an estimated $400 billion in wasted spending by using computers instead of paper, Hussein said. It also can save lives, “which is more important,” he said.
Quality makes software that doctors and dentists use to manage their practices. The company has grown amid a push toward “paperless” medical and dental offices.
Shares of Quality saw a big run-up in 2005 but have moved more gradually since,although the company’s shares have shot up some 32% from the start of August, something Hussein’s said is attributable to the company raising its dividend last month.
Quality had a recent market value of about $1.2 billion.
Hussein is sticking with his proxy solicitation for several reasons, including what he described as a lack of independence by the company’s board.
“These concerns led me to think that a board independent from management should be the board for Quality Systems,” Hussein said. “As far as I know, Mr. Razin is not Moses or Jesus Christ or Mohammed so that he doesn’t make any errors.”
Hussein, for his part, says he is keeping an open mind about Plochocki, although he said he voted against his hiring.
“I was not part of the process of (Silverman’s departure) or hiring Steve,” he said. “Mr. Razin named the committee to search for a CEO, (directors) Vincent Love and Russell Pflueger, and they hired Steve and the board came and approved their hiring.”
Quality’s effort in the board battle includes a pro-management Web site laying out its argument, along with responses to Hussein.
“We like to take the high road,” Plochocki said. “We want to talk about the future of the company. Unfortunately, we have this individual who has launched a third proxy fight, and at some point in time, we have to put the man’s character on the table for people to see.”
“For somebody who claims he’s in favor of shareholder value, why has he launched three proxy fights and lost two of them and obviously is going to lose a third?” Plochocki asked rhetorically.
Hussein’s most visible proxy fight, in 2005, culminated in a verbal jabbing session between himself and Silverman during an annual meeting. Hussein succeeded in having director Ibrahim Fawzy elected at that meeting, with ally Edwin Hoffman coming on board in 2006.
As for what might happen this year, Hussein said he didn’t know what he would do if the proxy fight is unsuccessful. He said he’d keep his options open until after the shareholders’ meeting.
“We have to take things as they occur,” he said.
Meanwhile, Plochocki said he’s also working on putting together a three- to five-year strategic plan for Quality this fall and outlining plans to grow the company.
“I believe in the next two to four years, Quality will be growing through a combination of organic growth and through acquisition, which will enable us to enter, perhaps, new business components and give us a running start,” Plochocki said. “The good news is that it’s not like walking into the company cold.”
