Investors often turn a blind eye to poor corporate governance if rewarded with a rising stock price. But when a high growth rate fails to translate into outperformance, vulnerability to an activist attack increases. Cornerstone OnDemand, a high flying talent management solutions provider, is a case in point.

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Cornerstone OnDemand

Cornerstone OnDemand has a host of activists on its register, with many longing for a sale. RGM Capital, an occasional activist which previously targeted Bazaarvoice and ShoreTel, recently called for a strategic review, but a more aggressive activist could speed up the process. Recently, a large shareholder describing itself as a behind-the-scenes activist told Activist Insight that shareholders are fed up.

Shareholders have indeed expressed their dissatisfaction. At the 2017 meeting, 24% of shareholders voted against the re-election of the talent management company’s visionary founder, Chairman and CEO Adam Miller. Lead director Mark Baker did not fare much better, with a similar number of shares voted against him. Moreover, recently-added board members Steffan Tomlinson and Dean Carter also received a high percentage of ‘against’ votes, unusual for new directors, who as a rule are given time to prove their worth.

The activist investor, which asked not to be named, speculated that most shareholders had been under the false impression that the company was looking for a sale. Indeed, a Bloomberg article in December saying that Cornerstone was mulling a transaction under pressure from investors, coupled with some veiled management comments that a deal was possible, indicated that a strategic review announcement was imminent.

However, despite repeatedly signaling that Cornerstone OnDemand was for sale, the board of directors met just four times in 2016. The investor believes the M&A rumor may have been put out by management itself in order to get CEO Miller re-elected in 2017.

Corporate governance is a big issue, perhaps unsurprising for a company with a strong founder and CEO – Miller owns 9.5% of the stock. Although there is no dual class of shares, the board is staggered, the CEO is also chairman of the board and elections of directors require a plurality vote. Two years ago, only 32% of investors supported management’s compensation. Following that disastrous result, Cornerstone OnDemand revised some of its policies, committing to more shareholder engagement, adopting a clawback policy and implementing share ownership guidelines, among other things. The next of its triennial say on pay votes is to be held in 2018.

In a letter to the board late July, RGM praised management for an “admirable job building the company to greater than $435 million in annual revenue,” but noted the firm’s margins had been lagging. Indeed, after a relatively strong first quarter– with profits of $0.08 per share comfortably beating analysts’ estimates of a $0.01 loss – the company disappointed in the following three-month period, posting a loss of $0.02 per share.

However, investors’ anger has been running high for more than two quarters, largely because the company has failed to turn a profit on a constant basis and growth has decelerated. Revenues have risen at a compounded annual growth rate of 37% over the past five years, but are slowing. The company’s stock price, meanwhile, is up just 39% over that period. By contrast, the technology-heavy Nasdaq 100 has gained as much as 113% and the SaaS-focused BVP Cloud Index more than 226% over the same period.

Before RGM’s intervention, Cornerstone OnDemand had as many as six partial focus activists on its share register, collectively owning around 20% of the stock - with Eminence Capital and Praesidium Investment Management among the largest members. Only Praesidium had filed a Schedule 13D – a tepid one at that – as long ago as February. Change could require a bigger shove.

Article by Activist Insight reporter Iuri Struta.