All the news that’s fit to print but money left on the table.
That’s ValueAct Capital Partners‘ message to The New York Times Co (NYSE:NYT), with the San Francisco-based activist fund disclosing a $350-million stake in the media company Thursday.
It’s a sort of homecoming for ValueAct, which has been one of the most active activists in Japan recently but hasn’t disclosed a sizeable U.S. investment since its buying into software company Insight Enterprises more than a year ago.
Q2 2022 hedge fund letters, conferences and more
ValueAct Plans To Engage With New York Times' Board
ValueAct's 13D filing was light on details about its plans to engage with the board or management team. Mason Morfit's outfit commonly seeks board representation for one of its senior employees – almost always through settlements – and likes businesses with subscription revenue or the early stages of a subscription model.
The chances of a proxy contest are remote but not impossible. ValueAct owns 6.7% of the company's Class A shares, which are entitled to elect 30% of the board. Class B shareholders, mostly held the Ochs-Sulzberger Trust, call all the other shots.
The New York Times enjoyed bumper shareholder returns between the November 2016 U.S. presidential election and its peak in October last year as readers flocked to it for political news. But it has faced a more difficult 2022 as investors have grown concerned about premium stock valuations, cutbacks in ad spending, and a potential recession combined with inflation hitting discretionary spending.
Although the Times has added new assets – the popular web-based game Wordle and sports website The Athletic, the latter at a cost of $550 million – its stock price had plummeted about 34% at Wednesday’s close. And, according to Insightia's Vulnerability module, the company is still expensive relative to its peer group even though its stock has been hammered far harder in the past 12 months. Then again, it outperforms those peers on most financial metrics.
The mood at Times HQ is still pretty buoyant, judging by an earnings call earlier this month. CEO Meredith Kopit Levien noted that the company's main strategy is to get news subscribers to spend more on ancillary products and that it has few concerns about the size of its market.
"[O]ur plan is to lean even more heavily into selling the bundle to new subscribers, and getting existing subscribers to upgrade in the back half of the year," she said. "We expect much of the revenue benefit from this to begin in 2023, as we follow our proven playbook of moving subscribers from introductory offers to higher prices over time."
If the company hits its target of 15 million subscribers, it will be able to return more cash to shareholders, Kopit Levien added, something that activists have increasingly been demanding at other companies.
Nonetheless, given the number of questions from analysts on costs and expenses and campaigns elsewhere by peers like Trian Partners and Starboard Value focused on cutting costs, ValueAct may yet get under the hood and look at where more profit can be carved out.
Indeed, in an August 4 note following earnings, Evercore analysts said third-quarter guidance was "better than feared."
"Management appears to be more focused on controlling expense growth given the macro environment and the company is still on track for margin expansion in 2023," the analysts said.
-- Josh Black, Editor-In-Chief, Diligent, Formerly Insightia
Say On Pay Proposals Continue To Be A Point Of Contention
Significant retention payments to C-suite executives are among the biggest sins in investors' eyes this season.
In a set of proxy season regional reviews, published August 5, proxy adviser Glass Lewis highlighted that "say on pay" proposals continue to be a point of contention among investors, largely due to outsized executive payouts.
In the U.S., companies have frequently made "numerous, one-off grants in a bid to attract and retain executives," in light of the highly competitive market for executive talent.
Awards "overwhelmingly" favored stock price appreciation over very short windows of time, the proxy adviser said, failing to sufficiently account for long-term company performance.
"When companies don't receive majority support on pay, there is elevated scrutiny from investors and proxy advisors in the following year and an expectation that responsive actions be taken," David Martin, managing director at PJT Camberview told me in an interview. "A driver of concern around pay remains large one-time awards."
This issue isn't unique to North America. In its Continental Europe proxy season briefing, Glass Lewis similarly noted that overly generous remuneration packages are becoming the norm, driven by retention concerns and pressure to bolster pay packages after a year of modest pandemic-related payouts.
"While most boards exercised restraint in their executive remuneration practices for FY2020, there was little delay in rewarding executives for a return to profitability in FY2021," Glass Lewis said in a briefing. "This was demonstrated both by an uptick in the number of discretionary awards granted, substantial base salary increases, and vesting at or close to maximum levels."
As a result of these poor practices, compensation plans have experienced a significant dip in support this season. As of July 31, 2022, the 2,732 advisory "say on pay" proposals subject to a vote at U.S.-listed companies have won 89.8% average support, compared to 90% throughout both 2020 and 2021.
In the first seven months of the year, 73 U.S. pay plans failed to muster majority support, compared to 61 and 64, respectively, throughout the two years prior, according to Insightia's Voting module.
D.R. Horton's proposed 58% year-on-year increase to CEO David Auld's pay ranks among the more egregious examples of excessive payments this season, while JP Morgan investors were similarly unimpressed with its proposed $52 million one-off award for CEO and Chair Jamie Dimon. Each proposal faced 72.6% and 68.8% opposition, respectively.
This is not to say that any and all one-off payments will face investor dissent. David of PJT noted that some investors "showed a willingness to support awards with rigorous performance hurdles, shareholder friendly guardrails, and compelling rationale."
Good disclosures and demonstrated responsiveness to shareholder concerns can help companies stay on the right side of their shareholders when retention awards are necessary.
"Strong engagement practices with investors are key to building support for one-time awards or other out-of-the-ordinary compensation actions," David said.
-- Rebecca Sherratt, Publications Editor, Diligent, Formerly Insightia.
