At Rovi, Activist Investor's Years of Protests Against Executive Pay May Give Leverage on Board

NEW YORK (The Deal) -- Three years of protest votes by shareholders against Rovi's (ROVI) executive pay packages mean activist investor Glenn Welling picked a relatively soft target for his short-slate proxy fight at the digital entertainment technology provider.

Welling's Engaged Capital is seeking to install three directors, including himself, on the Santa Clara, Calif.-based company's board at an annual meeting set for May 13. In a letter to Rovi's directors, Welling argues that shareholder returns have been negative overall since the company was formed by the combination of Macrovision and Gemstar-TV Guide International in May 2008. He also raised concerns about the "long tenured" board -- five independent directors have been around since the merger while most have had much longer tenures -- and that new cost management and return on investment expertise is needed.

The company operates an interactive TV-guide technology for multiple devices, an intellectual property licensing operation and an analytics business.

In a small way, Welling's campaign has already succeeded -- last Monday, Rovi expanded its board to seven members and added a little new blood in the form of a new director, Steven Lucas, an analytics and technology expert.

Will that be enough to appease the company's investor base? Not likely.

A review of non-binding shareholder votes on the company's executive pay packages, including compensation paid to Rovi CEO Tom Carson over the past three years suggests that there may be a number of disgruntled investors who could back Welling in his campaign.

In 2012, only about 70% of voting shares backed the top executive pay packages at Rovi, already a substantial vote of no-confidence. In 2013 Rovi received the backing of just 53% of voting shares. Finally, last year Carson and other executives received the backing of merely 40%, suggesting that a substantial majority of shares have significant concerns about pay and the performance of the company.

In both 2013 and 2014, proxy advisory firm Institutional Shareholder Services recommended shareholders vote against the Rovi executive pay plans. The substantial negative vote in 2014 was partly focused on Carson's 2013 compensation of $5.8 million, including roughly $4.7 million in equity grants. The 2013 vote was also likely a reaction to Carson's "new hire" pay of $9.98 million in 2012, which included an $8.9 million equity grant. According to the 2015 proxy statement, Carson was paid $6.7 million in 2014, including roughly $5.5 million in equity grants.

Semler Brossy Consulting, an executive compensation firm, in a May 2014 report attributed the sizable no vote that year to the level of Rovi's pay package compared to peers, the company's negative three-year total shareholder return -- which includes stock price and dividends -- and a reduction in short-term incentive goals in fiscal 2013 compared to fiscal 2012. A recent ISS Quickscore report, obtained by The Deal, gives Rovi its lowest score for compensation, 10 out of 10, suggesting that the company still has executive pay issues.

Nevertheless, Rovi has made a number of pay-related improvements, according to its March 23 preliminary proxy statement. It adopted a clawback policy, which authorizes the board to recover compensation paid to executives based on results that were subsequently restated or corrected. It also changed its pay package peer group of corporations.

These changes perhaps represent a response to Welling's agitation -- which began long before Engaged's public campaign was launched. Engaged privately nominated its slate in December but made the move public March 12 after an inadequate response from the company. Engaged believes that the pay packages have been terrible and Welling has been advocating for major changes to compensation policies for over a year, according to a person familiar with the situation.

Will the company's moves persuade institutions to support Rovi management against Welling?

Engaged on Thursday reduced its proposed slate to three directors from four, suggesting that Welling believes he will have more success with a less-hostile minority panel of candidates than a change-of-control group. That move and a review of Engaged Capital's past campaigns indicates that a settlement or some other concession may be worked out.

According to FactSet, Engaged Capital has launched 12 campaigns at 10 different targets resulting in four proxy fights (not including Rovi) since 2012. Of those proxy fights, two were settled with concessions involving the installment of new directors; one was withdrawn after the target -- Oplink Communications  (OPLK) -- agreed to sell itself. Another fight was canceled. In the latter case, the target, a drone manufacturer, saw its stock price double during the insurgency.

A recent acquisition debacle won't help Rovi's case. A person familiar with the situation suggested that all of the company's five independent directors, save newly appointed Lucas, were involved in the company's $720 million 2010 acquisition of Sonic Solutions. The company has either shut down or divested that entire business, with a final sale of its DivX video software unit last year for roughly $75 million.

Rovi's board brought in new managers after the Sonic fiasco, including Carson, who have worked to refocus and reposition the company. On a 2013 earnings call, Carson told analysts that Rovi is "mindful" of investor criticism of the Sonic acquisition and "concerns" about large deals or transactions outside of the company's strategic focus and core competencies.

"Any M&A activity we undertake will be well thought out, diligent and highly strategic with a focus on return on invested capital," Carson said.

A person familiar with the situation suggested that private equity firms have looked at buying Rovi in part or as a whole. "Given the cash flow generated from the IP business, PE interest is definitely possible," this person said.

Engaged owns just 0.6% of Rovi, which has a market cap of $1.7 billion market -- the small size of the stake works in the target's favor. But Welling's pedigree -- he worked with governance godfather Ralph Whitworth at Relational Investors -- should carry some weight with larger, longer-term investors. A settlement might be the company's best course.

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