Motley Fool Money - Activists at Autodesk’s Door

Episode Date: June 17, 2024

Starboard Value would like to see some changes at Autodesk and isn’t shy about it. And Jensen Huang’s commencement address at Caltech has some timeless life and investing advice.  (00:21) Tim Beyers and 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. Then, at (18:02) 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. Companies discussed: ADSK, AVGO, NVDA, TSLA. Catch Jensen Huang’s Caltech commencement speech here: https://www.youtube.com/watch?v=-qXDdToZHzE&t=3138s Go to www.monarchmoney.com/fool for an extended 30-day free trial. Host: Dylan Lewis Guests: Tim Beyers, Ricky Mulvey, Bryce Tingle Producer: Mary Long Engineers: Dan Boyd, Dez Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got wise work. from one of the leading names in tech, Motleyful Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Tim Byers. Tim, what's the caffeine situation looking like? This is a no-caffeine day, Dylan. So this is a dangerous day to do a episode of Motley Fool Money, but I'm going in anyway. You know what? 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. So 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 with 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? Well, first, it's not just that what a Starboard wants to see, it's what they're suing to see, Dylan. So 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. So 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. 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. And so this all came out. And what Starboard is accusing the board of is saying, hey, you told the SEC 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. And so there's a certain window that every company will have or say like, hey, you can nominate a director as a shareholder. You can nominate a director to the board. And 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.

So 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 it and say, hey, look, 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 that, if we're going to go with a headline here, Starboard is first accusing Autodesk of

some malfecese here, and then is saying, we got a big stake because we think Autodesk can do better. Yeah, I think no shareholder wants to hear accounting issues, and this was part of the Auditask 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 this 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 are running into was the company was not performing, and 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 to what Starboard is saying with how the company's being run outside of the accounting issues themselves. Yeah. I mean, there is, I forget the name of the movie, but there's a line in a movie where it's about, you know, I think it's, in fact, I think I may be quoting gross point blank here in which Martin Blank, John Cusack says, you know, 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 that's that, you were exactly right, Dylan. That's what's going on here. Starboard Value doesn't show up unless you. you do something to bring them there? And what they did, dramatic underperformance, poor use of capital, and then the final straw was this investigation and then failure to adequately disclose.

So 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. And so there's a lot of cost cutting that is available to auto desks. So Starboard Value, without saying it, they're not going to say the quiet part out loud, but the quiet part is you've got to lay a bunch of people off. That's a big part of it. Go ahead. So what's interesting is, it seems like from your perspective, there is a lot to what Starboard value is saying. Absolutely. But $500 million stake in a $50 billion company, that's 1% ownership here.

And as activists go, you know, that's not a ton. The market was happy to see Starboard get involved. Shares are at 5% today on the news. But how realistic do you think it is for anything to change? There's going to be a lot of pressure on Starboard. And 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, auto desk because they don't have to be the ones, like, 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, you know, big money managers that look at what Starboard is saying and say, like, yeah, 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. I mean, 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. So I would expect that there will be cost cuts. I expect there will be at least some kind of resolution and changes in the structure of the board. I think at least, 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. As I mentioned, we're talking to all things tech today, and this happened last week, but I wanted to get your take on it. Broadcom announcing a 10-for-1 stock split last week following their fellow chipmaker,

NVIDIA. Tim, dividends and stock splits are back in style in tech. What year is it? Is it 2000? I don't know. I thought it was 2024. I thought it was 2024, but yeah, the last time stock splits were showing up with this kind of 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 kind of, we've sort of pushed split. out of the limelight for such a long period of time that now we have reached the point where, hey, we got to be, 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 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. So, yeah, it's a little strange that we're seeing this now, but I think it's just pent-up demand. Stock prices have gone. many stocks, like you're in the thousands per share. Now we've kind of reset it a little bit and get investors thinking like, hey, you can afford to buy a share of this. So yeah, it's interesting to see it, but boy, does it harken back to those days, which is a little terrifying, Dylan.

Yeah, I was going to say that 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 stocks splits recently. Is that a nod to just the inevitability, the enduring element of investor psychology with this stuff? Of course it is. Of course it is. And we see this all the time on Motley Fool Live. We see it on the discussion boards. There is a perception that if a stock, you know, if you're a small investor and a stock trades in the thousands upon thousands of dollars, you know, that comes across to you as unaffordable.

And so fractional share buying is, that's something that people learn and they adopt, but it takes a little work to adopt it. You kind of have to get your head around it. What you think is like, hey, if I want to buy a share, I got to come up with like $2,500 or whatever it is. So splits do help with investor psychology in that way. But as we all know, they create bupkis, no value whatsoever. 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 prices over that four-figure mark, and that's because it's gone on a heck of a run,

up 2400% over the past decade, up 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 years. Is this a company people should be paying a little bit more attention to? 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 I mean, all of that stuff, particularly in the moment we're in, where we are absolutely obsessed with hardware and hardware build out and infrastructure build out for AI. Yeah. 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 of most of the tech companies that have like a snazzy one-liner. That ain't broadcom, so it gets overlooked. And you know what? Sometimes those are some of the best businesses to take a look at. You know who does have that zip, Tim? You know who does have that immediate name recognition? I know where you're going with this.

Invidia. They are the inevitable company of our time, of our moment. And Jensen Huang spoke at Caltech's 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. 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. And 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.

And Jensen Wong went up to him and said, what are you even doing? It doesn't look like you're doing anything. It's like, but, you know, and he was using like these tiny little tweezers to do little bits of pruning. It's like, how can you do that? This garden is so big. It's like, I've been doing this for 25 years. I have plenty of time. And so 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. 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. So I thought that was fascinating. Put a little pressure. I'd be like, oh, okay, thanks for up in the game on me a bit. But I mean, that is, that's an interesting bit of wisdom. And wisdom can be found everywhere. Yeah, what do you have booked for 9 a.m. tomorrow, Tim. What are you working for me? Exactly. Yeah, thanks. No pressure.

I zoomed in on the same quote there, and I think there's wonderful career advice in there. But I think, you know, it's incredibly applicable to investing in our style of investing, you know, to say I have plenty of time. I, you know, especially someone who has lived that, he has been the executive there for 30 years. You know, as we look out on our own investing journey, you know, 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 our 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. But, you know, 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 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. So doing nothing actually is doing something.

And then just kind of picking your spots, like really, you know, focusing on, 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 that, this idea of just relentless focus and not overdoing it. I mean, I can always use that reminder, although, man, I mean, is that guy just too cool for school or what? He finds 48 hours in the day, I swear. I don't know how he does it and manages to 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 today with me on the show. Thanks, Dylan. Some of the best lessons don't come from a classroom. They come from experience. On the power of advice, a new podcast series from Capital Group, you'll hear from CEOs, investors and founders about how they built careers, took risks, and reinvented themselves.

If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast. Published by Capital Client Group, Inc. 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. 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? 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. 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 sort of a contract with the CEO of Tesla. Yeah, that's a really great question. And I think it's the view of most sort of average investors. This pay package was fully disclosed. It was talked about in the media. The shareholders already approved it. So it seems strange that, you know, six years later, Delaware court would

throw it over. The Delaware court's 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, you know, giant option award was worth, I think, at its peak about $56 billion. That's a, it's a strange view to the average investor because the average investor doesn't understand the degree to which director independence, the independence of processes, have become sort of central to Delaware law and corporate governance. generally.

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 do these firms usually play in these kinds of votes? And how did it, you know, why was there such a contradiction here? So proxy advisors, their business model is catering more or less to the prejudices of their clients, which are the institutional shareholders. And 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. that own the shares. So 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. So 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's recommendations were broadly covered in the process.

press. Retail investors, I think, aren't used to following those proxy advisors, and they obviously didn't. What 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. This pay package was called by the former Tesla General Counsel. So it's someone who used to work at Tesla, Todd Marin, is, quote, 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, end quote. You've studied some CEO pay packages. Is this the most shareholder-friendly pay package ever

conceived? Does Mr. Marin have a point here? Yeah, he's probably right. I remember in 2018, when the pay package was announced, New York Times deal book, sort of canvassed opinion on the street and noted that most of the people they talked to regarded the payout as, quote, 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. So 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. So I think the view of most shareholders in 2018 was not unreasonably, look, if

this thing pays out, I'll have made a fortune on my stock. So I'm not particularly bothered by it. Logically, I would think that if a CEO owns a lot of stock in the firm that they're leading, or they have sort of options incentives tied to the performance of the stock over a three, to five-year period, you would 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 kind of breaks the logical sense. Yeah, sure. It seems counterintuitive. We tend to think if you put the carrot in front of the donkey, the donkey will walk faster. And 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, it seems counterintuitive, but there's a few reasons that it 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 their organization succeed. They're motivated by loyalty to their teams. They're motivated by the desire to see a job,

you know, to see a thing well done to do their job at a very high level. These sorts of intrinsic motivations. We have lots of research suggests can be displaced if you dangle a big enough dollar number in front of someone. Another reason why for the sort of 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, it tends to, people tend to perform better with incentive pay, but if a task requires lateral thinking, if requires creativity, if it requires working with other people, actual performance goes down in the presence of sort of life-altering sized rewards. And that may be because people get too nervous, so 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. So 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 Full Money? Sure. Well, one thing you have to recognize is we didn't start using incentive pay, really, until the 1990s. Since, you know, for the four decades or so after the Second World War, on a inflation-adjusted

basis, most executives got paid around a million dollars. 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 kind of in the late 1980s, early 1990s, that we really started loading executives up with equity and equity incentives and stock options, that sort of thing. And though that incentive pay is, and this is relevant to Tesla, the source of nearly all of the growth in executive pay that we've seen in the last 30 years.

When you look at that history, you say, well, look, you know, retail. Dell investors did great in the 50s and 60s in America. They did pretty well in the 80s. The 70s were kind of a disaster, but that was for reasons that maybe had nothing to do with corporate governance, but instead a challenging macro environment. So it's not clear that you need incentive pay to get managers to do their jobs. I've argued, I can argue at length of my book, that the truth is managers find themselves, you know, 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

don't bankrupt. As always, people on 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.