Board Shakeup At Salesforce Is A Sign Of Higher Scrutiny For Corporate Directors

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Even though revenues increased in 2022, changes did not come fast enough, and shareholders lost confidence.

The board of director changes announced at Salesforce in January may be signaling how activist investors intend to influence boards in 2023. Elliott Management, ValueAct Capital, Starboard Value and Inclusive Capital, all who own shares of Saleforce, appear to have banded together to use their influence to force changes to the Salesforce board. This approach, while not new, may encourage more shareholders to band together in groups and use that leverage to accelerate change at other companies.

Over the last year, several large shareholders lobbied for changes at Salesforce, including Elliott Management, which has an estimated $55 billion stake in the company. With Elliott taking the lead, Salesforce announced it would be adding three new members to its board on March 1:  Arnold Donald, former president and CEO of Carnival Corp.; Sachin Mehra, chief financial officer of Mastercard; and Mason Morfit, CEO and chief investment officer of ValueAct Capital. Salesforce directors Alan Hassenfeld and Sanford Robertson, who have been on the board for 20 years, will not stand for re-election.

To be clear, the Salesforce board was considering making changes at the company since last year. Even though revenues increased by 14% in 2022, the board was aware that the company needed to adjust in what has been a difficult economic environment for tech companies. However, changes did not come fast enough, and the four shareholders lost confidence in the board due to previous decisions involving acquisitions and hiring. Among the board’s moves that were questioned: Did Salesforce hire too many workers during a time of economic uncertainty? Was the $28 billion acquisition of Slack a good decision for the long-term growth of the company?

Corporate boards should expect higher scrutiny in 2023 because of the following:

• Activist investors appear more willing to form alliances to oust board members. Activist shareholders appeared to team up to pressure the Salesforce board to make changes in strategy. Over time, several investors shared their opinions with the board and when action did not come right away, they increased their stake in the company. Perhaps boards can make an argument for opposing one shareholder but opposing four large shareholders in a proxy fight holds less chance of success. Corporate boards may need to consider being more open to incorporating some of their shareholders’ strategic insights before disagreements evolve into proxy fights.

• The amended universal proxy card rules could encourage more contested director elections. The use of the universal proxy card allows shareholders to challenge incumbent directors more easily for control of board seats. We may see targeting of specific directors as a result. This will create public accountability that has not existed in the past. Directors will need to weigh the consequences of being voted off a board against compromising with the positions of activist investors.

• Shareholders appear to be more demanding of change, even in difficult economic and market conditions. Although Salesforce boosted revenues 14% last year, activist investors are complaining that the increase is down from the 27% gain from the year before. For some reason, the salesforce board is not getting the benefit of the doubt from its main investors. This may indicate that shareholders are becoming more unreasonable in their demands for profits, especially when you consider that Salesforce grew during the Covid-19 pandemic and a sluggish economy. Now recession fears are stoking more shareholder concerns.

Boards may need to recognize that they have to articulate their strategy for dealing with difficult conditions more quickly and clearly so that they can maintain the confidence of investors. They must show that they are anticipating downturns and that their growth strategies are adaptable to changing conditions. And they need to get that messaging out before activists can paint them as unaware of potential risks and slow to recognize opportunities.

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