Activists at Autodesk’s Door

In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:

• Why Starboard Value is putting Autodesk‘s management team and board on notice.

• Broadcom‘s 10-for-1 stock split, and why the ’90s are alive and well in tech.

• Nvidia CEO Jensen Huang’s advice for graduates at Caltech and wisdom from 30 years at the helm.

Motley Fool host Ricky Mulvey talks with Bryce Tingle, business law professor and author of the new book Hard Lessons in Corporate Governance about Elon Musk’s big pay raise.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on June 17, 2024.

Dylan Lewis: We’ve got wise words from one of the leading names in Tech. Motley Fool Money starts now. I’m Dylan Lewis, and I’m joined over the airwaves by Motley Fool analyst Tim Beyers. Tim, what’s the caffeine situation looking like?

Tim Beyers: This is a no-caffeine day, Dylan. This is a dangerous day to do an episode of Motley Fool Money, but I’m going in anyway.

Dylan Lewis: I’m still hearing the excitement and I’m happy to hear it. You are here today so we’re going to keep things tech-related with the show. We have some more activist action. We have some wisdom from Tech’s biggest CEO of the moment and a dive into Elon Musk’s pay package. Why don’t we talk to the activists here, first, Tim? Autodesk is in the news because Starboard Value disclosed a $500 million stake in the Architecture software company. They submitted their letter to the board and they’re pushing for some changes. Let’s dig in. Tim, what does Starboard want to see?

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Tim Beyers: Well, first, it’s not just what Starboard wants to see, it’s what they’re suing to see, Dylan. For those who don’t know, Starboard Value is a fund that they are an activist investor, like you said, they invest in a lot of different companies. They invest in situations where they believe there is untapped value and in order to get that value unlocked, the company needs to maybe change its ways a bit. We’ve seen this in the past, where Starboard has invested in so Box was a target a few years ago, for example. Now, Autodesk has the target on its back and I think deservedly so, for those who don’t know, there was an investigation by the audit committee in which the audit committee disclosed that Autodesk’s process for selling its software, they said that it was going to change, that they were going to move to a process of annual billing, its customers and that this was going to be really good for the business. This would be good for free cash flow and what happened instead, is when the business was having a hard time, meaning its free cash flow targets, it reverted to type, Dylan. It went back to selling multi-year agreements, which it was actively telling shareholders it was going away from. This all came out, and what Starboard is accusing the Board of is saying, you told the ACC in early March 2024 that this was going on but you didn’t tell shareholders until after the window to submit new potential directors, board members for the company because, remember, the board of directors is elected by shareholders. There’s a certain window that every company will have or say, you can nominate a director, as a shareholder, you can nominate a director to the board. What Starboard is saying, you didn’t disclose any of this until that window for Autodesk was closed. That isn’t right. You should not be allowed to do that. The lawsuit, Dylan, is about getting Autodesk to delay its annual meeting of shareholders so that the process can reopen and Starboard, presumably can introduce its own slate of directors that shareholders can vote on and say, we’ve got these three people. We think these three people are better. They will agitate for the changes we’re looking for. I’ll pause there. We could talk a little bit more about the changes they’re looking for but if we’re going to go with a headline here, Starboard is first accusing Autodesk of some malfeasance here, and then is saying, we got a big stake because we think Autodesk can do better.

Dylan Lewis: I think no shareholder wants to hear accounting issues and this was part of the Autodesk story recently, and you certainly don’t want to hear it when it is core to what was really the thesis for a lot of people for business recently and you mentioned the struggles that they had, and I think shareholders were willing to accept a certain amount of pain. We know that happens when we switch from the licensing model to more of an annual billing model. The trouble that I think a lot of people were running into was the company was not performing and if you look at the stock itself, not outperforming the S&P by any stretch over the last year, over the last three years, over the last five years. It feels like there’s quite a bit of credence here so what Starboard is saying with how the company’s being run outside of the accounting issues themselves.

Tim Beyers: I forget the name of the movie, but there’s a line in a movie where it’s about, I think I may be quoting Grosse Pointe Blank here in which Martin Blank, John Cusack says, if I show up at your door, you probably did something to bring me there. If Starboard Value shows up at your door, you did something to bring them there and you are exactly right, Dylan. That’s what’s going on here. Starboard Value doesn’t show up unless you do something to bring them there. What they did, was dramatic underperformance, poor use of capital and then the final straw was this investigation and then failure to adequately disclose. What Starboard Value is saying, getting back to your other question, they believe that Autodesk has a lot of room. They say they’ve got best-in-class gross margins, but their operating margins are terrible. There’s a lot of cost-cutting that is available to Autodesk. Starboard value without saying it, they’re not going to say the quiet part out loud, but the quiet part is, you got to lay a bunch of people off. That’s a big part of it. Go ahead.

Dylan Lewis: What’s interesting is, it seems like from your perspective, there is a lot to what Starboard Value is saying.

Tim Beyers: Absolutely.

Dylan Lewis: But a $500 million stake in a $50 billion company, that’s 1% ownership here and as activists go, that’s not a ton. The market was happy to see Starboard get involved. Shares are up 5% today on the news but how realistic do you think it is for anything to change?

Tim Beyers: There’s going to be a lot of pressure on Starboard. Especially if this suit does go through, Starboard is going to start rallying other institutional shareholders to its slate of directors, and it’s going to put a lot of pressure on Autodesk because they don’t have to be the ones. It’s not their shares that are going to get their directors to the board if a court agrees and reopens the nominating process, it’ll be a bunch of other institutions, pension funds, big money managers that look at what Starboard is saying and say, you know what? I’m going to vote my shares on those Starboard board members and if that happens, then you are going to see meaningful changes. They do have a record of enforcing some changes, at the very least, the public pressure that they tend to put on companies. When they did this with Box, they didn’t win everything but Box started to clamp down. They got a lot more efficient and that stock has responded since Starboard got involved with that company. I would expect that there will be cost cuts, I expect there will be at least some resolution and changes in the structure of the board. I think at least those two things are going to happen, Dylan, and maybe a resetting of expectations around what you will see from Autodesk over the next couple of years.

Dylan Lewis: As I mentioned, we’re talking all things Tech today, and this happened last week, but I wanted to get your take on it. Broadcom announcing a 10-for-one stock split last week, following their fellow chipmaker NVIDIA. Tim, dividends and stock splits are back in style in Tech. What year is it?

Tim Beyers: Is it 2000? [laughs] I don’t know.

Dylan Lewis: I thought it was 2024.

Tim Beyers: I thought it was 2024, but the last time stock splits were showing up with this regularity, it was during the dot-com era. I think back then, it was even more frantic and outrageous but we have reached this period, Dylan, where we’ve pushed splits out of the limelight for such a long period of time that now we have reached the point where we can’t just do two for one splits. You’re not doing it right unless it’s at least 10 for one. I can understand that because there are some stocks where adding some liquidity into the market by virtue of a bunch more shares that opens up the options market for them. It doesn’t really create affordability because of fractional shares. But there are some investors who are like, hey, if I got $100, I want to buy a whole share of something. I don’t want to buy a fraction of something so it creates the perception of affordability. It’s a little strange that we’re seeing this now, but I think it’s just pent up demand. Stock prices have gone so many stocks in the thousands per share. Now we’ve reset it a little bit and got investors thinking, you can afford to buy a share of this. It’s interesting to see it, but boy, does it hearken back to those days, which is a little terrifying, Dylan.

Dylan Lewis: I was going to say the main difference between the dot-com era and now is the rise of fractional shares and yet, we have seen so many very big, very prominent companies going through stock splits recently. Is that a nod to just the inevitability, the enduring element of investor psychology with this stuff?

Tim Beyers: Of course, it is and we see this all the time on Motley Fool Live, we see it on the discussion boards, that there is a perception that if you’re a small investor and a stock trades in the thousands upon thousands of dollars, that comes across to you as unaffordable. Fractional share buying that’s something that people learn and adopt but it takes a little work to adopt it. You have to get your head around it. What you think is like, if I want to buy a share, I got to come up with $2,500 or whatever it is. Splits do help with investor psychology in that way but as we all know, they create no value whatsoever.

Dylan Lewis: I do want to use this as a chance to check in on Broadcom a little bit. It is one of those companies where share price is over that four-figure mark, and that’s because it’s gone on a heck of a run up 2,400% over the past decade, and over 100% over the past year. Not a name that we talk about, a ton here, Tim. But in a space that’s very interesting and has gotten so much attention, especially in the last couple of years, is this a company people should be paying a little bit more attention to?

Tim Beyers: Sure, it’s an infrastructure company. It’s on the rule-breaker scorecard. The reason it doesn’t get nearly as much love is it’s really complicated and it is a mess of stuff. Like, it’s infrastructure, but it’s a lot of stuff that’s come together. But all of that stuff, particularly in the moment we’re in, where we are absolutely obsessed with hardware and hardware buildout and infrastructure buildout for AI, Broadcom is a stock of the moment, but it’s also a good business and it had a long period of time where it just wasn’t getting nearly enough stuff here. But just to give you a sense of how messy this thing is, they do everything from systems on a chip, to hardware components, to optical networking. It’s just all of the things. It’s lots of infrastructure stuff and so it is highly useful, highly interesting, well-run business, but very confusing. It doesn’t have the zip. Most of the tech companies have, like, a snazzy one-liner. That ain’t Broadcom, so it gets overlooked. You know what? Sometimes those are some of the best businesses to take a look at.

Dylan Lewis: You know who does have that Zip Tim? You know who does have that immediate name recognition?

Tim Beyers: I know where you’re going with this.

Dylan Lewis: NVIDIA. They are the inevitable company of our time, of our moment, and Jensen Huang spoke at Caltech Commencement this week. I wanted to talk through some of his comments to him because you are one of these sources of wisdom and investing mindset conversations here at the Fool and I thought it might be fun to reflect on some of his comments because it was, I watched the whole speech, a tour of the last 30 years of tech, but also managing innovation, managing business pivots and there was a lot of really great stuff there for investors.

Tim Beyers: Here’s the thing that I want to focus on. I’ll be curious of what other quotes struck you, but one that struck me was the story of the Japanese gardener that he met. As I heard him talk about how this Japanese gardener who was doing, really minute pruning of I think it was a bamboo garden in Kyoto, Japan and it looked like you really wasn’t doing anything. Jensen Huang went up to him and said, what are you even doing? It doesn’t look like you’re doing anything. He was using these tiny little tweezers to do little bits of pruning. How can you do that? This garden is so big? He said “I’ve been doing this for 25 years. I have plenty of time.” It just reset perspective for Jensen, like I have plenty of time. Particularly and this is what he said the lesson was for him as he starts his day with his most important work so then the remainder of the day is free to him to do what is important in that moment, including meeting with all of his employees. I thought that was fascinating. It put a little pressure on me like. Thanks for upping the game on me a bit, but that’s an interesting bit of wisdom and wisdom can be found everywhere.

Dylan Lewis: What do you have booked for 9:00 A.M. tomorrow, Tim?

Tim Beyers: [laughs] Exactly. Thanks. No pressure.

Dylan Lewis: I zoomed in on the same quote there and I think there’s wonderful career advice in there, but I think it’s incredibly applicable to investing in our style of investing. To say, I have plenty of time, especially someone who has lived that. He has been the executive there for 30 years. As we look out on our own investing journey, it doesn’t seem like we are doing much day-to-day as we are adding small amounts of money to our portfolios, whether it be in 401Ks or putting new money to work in our brokerage accounts but over time, it builds up and we have plenty of time for that to happen.

Tim Beyers: But the important thing that you said there, and I’m going to double underline it is in investing, particularly in long-term investing, you do your work, and then doing nothing is doing something. I’ll say that twice because it’s so important. Doing nothing in the long-term investing is doing something and here’s the reason for it. You aren’t getting in the way of compounding. You don’t want to get in the way of compounding. It’ll compound on its own if you let it. If you don’t let it get in the way. Doing nothing actually is doing something, and then just picking your spots. Really if you focus your attention on, what are the ways that this business creates value and then all you’re going to do is just measure that and not try to measure everything. You’re doing the work and not killing yourself in the process so there is something about this idea of just relentless focus and not overdoing it. I can always use that reminder. Although, is that guy just too cool for school, or what?

Dylan Lewis: He finds 48 hours in the day. I swear. I don’t know how he does it. Just look cool in a leather jacket at the same time. Just unbelievable. Listeners, we’ll drop the link to his full commencement speech into the show notes. Tim, thank you so much for waiting through All Things Tech and Mindset. Stay with me on the show.

Tim Beyers: Thanks, Dylan.

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Dylan Lewis: Coming up. Tesla shareholders just voted to give Elon Musk a major pay raise. Ricky Mulvey talks to Bryce Tingle, a business law professor and corporate governance expert on whether this pay package is a win for Tesla shareholders, and how incentive pay for CEOs has shifted in recent decades.

Ricky Mulvey: Bryce, you have a book, it’s called Hard Lessons in Corporate Governance. Last week, we got a lesson in corporate governance and that was with Elon Musk, the CEO of Tesla’s pay package. Tesla shareholders voted to uphold a 2018 decision that essentially gets Elon Musk $48 billion in his pay package. You’ve studied CEO pay. You’ve studied a lot of corporate boards and decisions. What was your reaction to seeing that go through?

Bryce Tingle: This whole situation is so incredible that a year ago, if I had given it to law students in a final exam, there would have been protests with the Dean. The fact that the shareholders approved a pay package, which has already been earned out and then disqualified, the fact that we have no idea whether or not the shareholder vote is going to be at all useful in the legal maneuverings in Delaware, it’s just all fascinating.

Ricky Mulvey: Why are there multiple votes on this? On a straightforward basis it seems that this was approved in 2018, and then it was brought down by a Delaware judge, and now it’s getting voted on again. Why didn’t it go through originally? It seems like the shareholders may have had a contract with the CEO of Tesla.

Bryce Tingle: That’s a really great question, and I think it’s the view of most average investors, is this pay package was fully disclosed, it was talked about in the media. The shareholders already approved it so it seems strange that six years later, Delaware Court would throw it over. The Delaware’s Court concern was that Elon Musk is essentially the controlling shareholder of Tesla and as a controlling shareholder, Tesla had not done an adequate enough job disclosing the degree of influence Elon Musk had over the process that resulted in this giant option award. It was worth, I think at its peak, about $56 billion. That is a strange view to the average investor because the average investor doesn’t understand the degree to which director independence and the independence of processes have become central to Delaware law and corporate governance generally.

Ricky Mulvey: Another piece of this vote was that shareholder advisory firms, and there’s two big ones, ISS and Glass Lewis recommended voting against this pay package, and usually, these institutions have a large influence on corporate proxy battles. What role did these firms usually play in these votes and why was there such a contradiction here?

Bryce Tingle: Proxy advisors, their business model is catering more or less to the prejudices of their clients, which are the institutional shareholders. Tesla is unusual in that only about half its stock is owned by institutional shareholders. The other half are owned by retail shareholders. We have lots of evidence that the interests of the fund managers who manage institutional shareholders differ from the interests of the flesh and blood human beings who own the shares. We know, for example, that the flesh and blood human beings care a lot more about financial returns than they do about governance issues or environmental and social issues, for example. Proxy advisors, most retail shareholders don’t even know what the proxy advisors recommend on a vote. That wasn’t the case here though, where institutional shareholder services and Glass Lewis recommendations were broadly covered in the press. Retail investors, I think, aren’t used to following those proxy advisors, and they obviously didn’t. What’s surprising is that a significant percentage of the institutional shareholders also didn’t follow the proxy advisor’s advice and they voted in favor of Elon Musk’s pay package as well.

Ricky Mulvey: This pay package was called by the former Tesla General Counsel. Someone who used to work at Tesla Todd Merrin is “The most shareholder-friendly pay package ever conceived, no pay of any kind unless shareholders did better than anyone thought possible, and Elon should be celebrated for having signed up for it.” You’ve studied some CEO pay packages. Is this the most shareholder-friendly pay package ever conceived? Does Mr. Merrin have a point here?

Bryce Tingle: He’s probably right. I remember in 2018 when the pay package was announced, on New York Times Deal book, Canvassed opinion on the street and noted that most of the people they talked to regarded the payout as laughably impossible. Some of the people thought that the targets set in the pay package was just a publicity stunt on the part of Tesla and Elon Musk. These were not small goals. This was taking a company from $50 billion, effectively, I think the final earn-out was $650 billion in market cap plus hitting a bunch of operational milestones. I think the view of most shareholders in 2018 was not unreasonably, before this thing pays out, I’ll have made a fortune on my stock so I’m not particularly bothered by it.

Ricky Mulvey: Logically, I would think that if a CEO owns a lot of stock in the firm that they’re leading, or they have options incentives tied to the performance of the stock over a 3-5 year period, you’d expect that that stock would perform better for retail investors. You suggest that that might not be the case. Can you explain to the listeners why? Because it breaks the logical sense?

Bryce Tingle: Sure. It seems counterintuitive. We tend to think if you put the carrot in front of the donkey, the donkey will walk faster. Incentive pay is a giant carrot that we dangle in front of our executives. But there has been a lot of studies performed on incentive pay or pay for performance, and nearly all of it suggests that it doesn’t make much of a difference in the performance of companies, doesn’t have much impact on either operational improvements or improvements in share price. Now that seems counterintuitive, but there’s a few reasons that its suggested for it. One is that giant pay packages tend to crowd out other possible sources of motivation for CEOs so lots of people who go to work every day, they’re not motivated by incentive pay. They’re motivated to help the organization succeed, they’re motivated by loyalty to their teams, they’re motivated by the desire to see a thing well done, to do their job at a very high level. These intrinsic motivations, we have lots of research suggest can be displaced if you dangle a big enough dollar number in front of someone. Another reason why for the counterintuitive findings that giant incentive pay packages don’t make a lot of difference in performance is that researchers find that if a task is routine, people tend to perform better with incentive pay. But if a task requires lateral thinking, if it requires creativity, if it requires working with other people, actual performance goes down in the presence of life-altering sized rewards and that may be because people get too nervous, or they get too fixated or they only focused on the narrow tasks that are incentivized. It could be for a variety of reasons. But at this point, I think the evidence is pretty straightforward.

Ricky Mulvey: Is there any way to incentivize a CEO to act in the best interest of the retail shareholders, the retail investors listening to a show like Motley Fool Money?

Bryce Tingle: One thing you have to recognize is we didn’t start using incentive pay really until the 1990s. For the four decades or so after the Second World War, on an inflation-adjusted basis, most executives got paid around $1 million. There wasn’t much pay increase, it was all pretty flat, and that pay came in the form of salary and bonus. It was only in the late 1980s, early 1990s that we really started loading executives up with equity and equity incentives, stock options, that sort of thing. Though that incentive pay is, and this is relevant to Tesla, the source of nearly all of the growth and executive pay that we’ve seen in the last 30 years. When you look at that history, you say, well, retail investors did great in the 50s and 60s in America. They did pretty well in the 80s, 70s were a disaster, but that was for reasons that maybe had nothing to do with corporate governance, but instead of challenging macro environment. It’s not clear that you need incentive pay to get managers to do their jobs. I’ve argued and argued at length in my book that the truth is, that managers find themselves enmeshed in competitive markets. They don’t have a lot of choice except to work really hard to succeed. If they started slacking or diverting money they would quickly lose their job or the company would go bankrupt.

Dylan Lewis: As always people in the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what you hear. I’m Dylan Lewis. Thank you for listening. We’ll be back tomorrow.

Dylan Lewis has no position in any of the stocks mentioned. Ricky Mulvey has no position in any of the stocks mentioned. Tim Beyers has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Autodesk, Nvidia, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Activists at Autodesk’s Door was originally published by The Motley Fool

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