Proxy Season Preview: Board knowledge and skill votes, plus board appointment fails, fake CEOs, and activist updates

PROXY COUNTDOWN SCRIPT

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This is Proxy Countdown. Welcome to the big show for the week of August 5, 2024. I'm Matt Moscardi. On today’s countdown:

1. A relocation cost-off for new executives

2. Marathon Petroleum’s lady CEO arbitrage

3. Pre election directorships

4. Howard Schultz’s forever entitlement

5. And on the Big Vote, our first 2024-25 season review starting with who has the skillz

TRADE WIRE

Just the highlights

Board appointment analysis - run down appointments, do the bigger analysis here instead of proxy

First, some executive trades:

1. Logitech, better known as “everyone’s computer mouse”, announced the acquisition of Matteo Anversa to fill the vacant CFO role.  

1. Anversa starts on September 1, and his contract includes a buyout, a $700k salary, a 3 year vesting $3m PSU grant, and another team bonus ranging from 0-200% of base salary

2. They also have a very nice 10k per month “relocation assistance” and a separate closing cost assistance up to $100k and pay any private school costs prepaid in his old location up to $5k per month - total relocation cost could hit a max of $280k

2. Todd Penegor, ex CEO of Wendy’s, has been named CEO and board member for Papa John’s International

1. Penegor will get a $1m base salary with 150% target bonus, $5m RSU grant, and a “cash transition” bonus of $250k

2. More importantly, in a Penegor vs. Anversa relocation cost-off, Penegor loses - he has $150k in relocation expenses to move from Dublin, Ohio to Atlanta while Anversa gets as much as $280k to go from Michigan to San Francisco.

3. Clearly, Papa John’s has moved passed its founder’s racist spouting as in the last year Shaquille O’Neal stepped down, who was appointed right after John Schnatter was forced out, as Penegor’s Wendy’s had the outspoken old man racist Nelson Peltz on their board

3. In gender pay gap news, Marathon Petroleum announced in May that Mike Hennigan was stepping down as CEO and into the Executive Chair position, reflecting his dedicated four years in the position of CEO, and announced Maryann Mannen, the CFO, would replace him.

1. In a filing this week, the pay details were announced - Hennigan’s base salary was reduced from $1.75m to $1.05m, with no change to his target bonus of 165% of base.  His long term incentive bonus was reduced to $8.88m from $13.4m

2. Meanwhile, to do the same job, Mannen was awarded a base salary of $1.4m, 20% less than Hennigan, and her target bonus was increased from 110% to 165%.  

3. She was given a one time long term incentive of $2.917m and a prior award of $5m for a total just under $8m for a long term incentive… 11% less than Hennigan in his new chair role and a whopping 41% less than Hennigan’s final year of CEOing

4. So we can infer that Mannen is barely CEO here, but congratulations on the promotion!

4. This week, Bumble announced Jennifer Morgan will resign from the board, and the board appointed Martin Brand to the board

1. Brand was a “non-voting observer” designated by Blackstone, who owns 62.9% of the voting power, more than founder Whitney Wolfe Herd who has 26%

2. Brand will effectively be the dual class dictator on the board - a non founder controlling stakeholder who has “observed” since the IPO

3. The move coincides with a move earlier this year that changed the service which had allowed women to make the first move in dating rather than men - men can now make the first move, and the company is now run by a man - men coming out on top at last!

And some board appointments:

1. Welltower Announces Addition of Andrew Gundlach to Board of Directors

2. NetApp Announces June Yang as New Independent Nominee for Election to Board of Directors

3. Nexstar Media Group Appoints Ellen Johnson to Board of Directors

4. Boston Scientific Elects David Habiger to Board of Directors

5. Kenvue Announces Board Changes with Two New Independent Directors

6. DeFi Technologies Appoints Andrew Forson to Board of Directors

7. American Airlines Names Howard Ungerleider to its Board of Directors

8. AEO Inc. Appoints Stephanie Pugliese to its Board of Directors

9. Arianna Huffington Joins Williams-Sonoma Board of Directors

10. Warby Parker increased its board size to 10 from 9 and appointed Bradley Singer as a Class I director and appointed him to the Audit and Compensation committees

11. There are more board positions appointed than we can count, which brings us to our Shadow Democracy analysis - if 20+% of virtually every non-controlled company is owned by one of three passive investors, and those companies appoint directors who serve for months before an actual election, will investors bother asking, “should they have been there in the first place?”

1. Investors need a new data point - pre election directorship percentage - that indicates how long, in particular, a director at a non controlled company gets to influence a board BEFORE investors get a chance to elect them

2. Take the Williams Sonoma announcement on Arianna Huffington - the last AGM was on May 29 - so Huffington gets 10 FULL MONTHS on the board BEFORE SHE GETS ELECTED

1. If she serves 7 years, the average tenure, she serves fully 12% of her total tenure UNELECTED

2. Her pro-rata pay before the next AGM in April will be roughly $67k base, $137k in equity grant, and assuming she’s named to one committee, another $13k or so, and discounts on merchandise, totalling ~$217k plus a year of influence

3. While it’s usually not a problem, it can be…

1. Mercury Systems had THREE new directors appointed between June 23 and July 2 of 2023 - the AGM was on October 25, 2023 - it’s a classified board with 11 directors, so management got to appoint more than a quarter of the board for ⅓ of a year with no oversight!  

2. TWO of the three new directors were put on the M&A committee

3. News in February of 2023 suggested Cobham, a UK-based tech company, was looking at a possible acquisition of Mercury Systems, who makes defense electronics

4. Imagine a scenario where a board approves an acquisition offer where the majority of the committee doing the diligence was appointed without investor elections?

5. Or take Thomas Gayner, who was added to the Coca Cola board and served 10 full months before he got a vote from investors - and they voted 39.1% AGAINST

4. I’m not sure there is another way, but investors should ask for one

PROXY CAGE MATCHES

1. Starboard escalated its ask of Autodesk, outlining seven years of missed financial targets under current CEO Andrew Anagnost, who has 25% influence over the board and a below average track record of earnings, batting .394, according to Free Float data

1. Here’s an excerpt from Starboard’s letter in June proving they listen to Proxy Countdown - “The Board determined that Ms. Clifford could no longer continue as CFO. However, Autodesk management then appointed Ms. Clifford to the newly created role of Chief Strategy Officer. This series of decisions again raises serious questions – if the Board determined the CFO could no longer serve as CFO, why would a new role be created for that executive? It is almost impossible to believe that another company would immediately hire Ms. Clifford to be its Chief Strategy Officer after she was removed from the Autodesk CFO position. So, how is it possible that Autodesk needed to create this new position of Chief Strategy Officer and needed to appoint Ms. Clifford into that position? One would have to ask why this was done, as it does not appear to be a sound or solely business-related decision.”

2. Starbucks' ex-CEO Howard Schultz now appears to be the sticking point in Elliott Management’s settlement offer with the board.

1. Schultz is, “forever entitled” to attend Starbucks board meetings unless the board “barred” despite the fact he is no longer on the board or working as an executive

2. The FT reported Schultz opposed the settlement, ostensibly because he is opposed to the CEO he chose as his own replacement, Laxman Narasimhan

3. Damion has already predicted what would be a FOURTH boomerang from Schultz, who stepped down after labor pressure he attempted to quash

VOTE RESULTS TABLE 

Large (leagues 3&4)

1. McKesson - Donald Knauss, ex CEO of Clorox, on the boards of Kellanova and Target, got 10% votes against along with Maria Martinez, though there seems to be no pattern given they sit on difference committees

1. There was a 12% vote against pay as well, and 16% against exculpation

2. Electronic Arts investors had no thoughts on board members, but did vote 12% against pay, which is almost nearly approaching an opinion

3. At Linde, Joe Kaeser got just over 10% against votes with nothing else notable - Kaeser is chair of the nominating committee, but isn’t flagged for anything particularly egregious, so it’s likely a fat finger at ISS or Vanguard resulting in the drop

FIRST SEASON PREVIEW

2025 IS THE YEAR OF SKILLZ

PREDICTION - SKILLS MISMATCHES GO MAINSTREAM

• Activist playbooks typically involve targeting undervalued or value unlocks, but focusing on the board and management exclusively

• Core part of every deck: “the board lacks the necessary skills to unlock value”

• There’s a space race for the “skills matrix”, but they’re unreliable (the same directors have different skills in different companies), voluntary (“diversity” is often listed as a “skill” since these are unregulated), and non-standardized

• But investors should know the makeup of their teams of elected fiduciaries - who they are and what they know

• This season is the first time we start to see “skill votes”, especially in the wake of AI

We generate knowledge maps - there’s an important difference between knowledge and skill

Company overweights

Where a particular knowledge type is overweighted in the board room despite it not being core to the industry

• CS Disco

• AI law technology

• IPOed in 2021, but after 3 years still have startup mindset

• Heavy on VC investors on the board

• Add a law professor on the board - feels like an afterthought, ignore the law

• Have zero AI pros on the board

• Vast majority of the influence is investor/finance/MBAs, not computer/tech/AI/law

• Company hasn’t adjusted to reality even though it’s still technically possible to vote out directors

• Our data: most common industry knowledge for Application Software is Computers/Electronics, but on an influence basis, CS Disco has a 38% overallocation of board knowledge to Econ and finance and a 20% underallocation to Computers/Electronics

• Inari Medical

•  A medical device company

• 51% of board influence is economic/finance and 7% is medical… where the industry average is 22% medical and 17% economic

• The board is full of medical device executives - but it’s misleading, and where the data helps identify gaps

• CFO at medical device company (background in finance)

• CEO at medical device company (background in sales)

• SVP from life sciences (background in business development)

• “20 years experience in life sciences” (accounting)

• VCs in medical devices (backgrounds in finance)

• CEO was head of commercial (sales)

• There is ONE doctor on the board who might use the devices

• Ziff Davis

• Digital media company with a huge roll of digital brands under its umbrella

• Biggest thing the data noticed - the highest average knowledge type for Interactive Media industry is Fine Arts - creatives, effectively - and Ziff tilts heavily towards law and finance as a core trait of its board

• +13% influence tilt toward law in the board room, but more telling is the -22% tilt toward Fine Arts

• The data shows what is a common pattern - insider knowledge consolidation

• We saw this with Disney - prior to Peltz’s intervention, Disney’s board was devoid of media talent, with only Iger as the lone voice in the room

• It served to undermine Chapek, as well - Chapek was from parks and finance and his lack of media as a core skill served to undermine his perception in the board room and beyond

• At Ziff, the CEO is the only board member with media experience - there are CFOs, CTOs, marketing, advertising, and law represented, but zero other content media executives

• The result?  “Influence of knowledge”

Season prediction

• Investors will - or should - put a premium on knowledge and skills - and they should NOT trust the skills matrix

• Board members have told me explicitly that they’ve been tagged as having certain skills because they’re the only ones in the boardroom with any experience - like taking a class in privacy law and saying you’re an expert

• But on another company, they don’t even rate - knowledge and skills in the context of boards shouldn’t be relative (or I’d qualify as “professional athlete” in some boardrooms), it needs to be married to absolute skills and knowledge (such is to say, the things a director actually knows absent the other board members)

• Investors have asked for things like cybersecurity in the past, but boards should be viewed as teams with all round players, key position players, and offsetting players

• The gap between management knowledge and director knowledge might be the most important gap to watch this season

DAMION:

That’s the Proxy Countdown for the week of August 5, 2024. Join us next time when we jump back into the Alternative Democracy pool... forever on the lookout for shareholder sharks, floating bandaids, and wayward directors.

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