Estimated reading time: 3 minutes, 17 seconds

INTUIT'S PECULIAR SITUATION

Relational  InvestorsWhen someone develops a theory, there's a tendency to view all facts as having something to do with that theory, and most of us readily believe that the facts support our assumption. And hopefully, I am not doing that with events at Intuit and its upcoming relationship with investment firm, Relational Investors.

 

To recap, Relational Investors put up a three-person slate of candidates for the Intuit board of directors who will be chosen at the Intuit Annual meeting on December 15. So early in October, Intuit agreed to support David Batchelder, one of Relational's principals, as a candidate for the seat that is conveniently being vacated by former Intuit CEO Stephen Bennett. Bennett told the board on October 1 that he would not stand for re-election. Nice how that worked out.

The important thing is Relational's reputation for buying into underperforming companies. It has also gotten or participated in getting the heads of a couple of CEOs, including one at Home Depot in 2007. That happened after Home Depot agreed to put Batchelder on its board rather than get into a proxy fight over electing directors. It sounds a bit familiar.

On October 20, the Intuit board set the threshold for awarding executive bonuses for the year ending July 31, 2010. That plan was filed with the SEC on October 26. Two days later, Intuit filed another SEC document announcing that beginning with the 2010 annual meeting, stockholders will get the opportunity to take an advisory vote on whether they concur with the company's compensation philosophy, policies and determinations for its named executive officers.

Recalling that Ralph Whitworth, founder and principal for Relational, has a reputation as an expert on corporate governance, it's hard not to try to see a link between the board's action and Batchelder's upcoming term.

Now, the filing of proxy documents with the SEC on Friday shows the kind of clout that Relational has. Batchelder, through funds owned by or managed by Relational, has 4.11 percent of the outstanding stock. As an insider, that would put him second to Intuit founder Scott Cook, who has 6.26 percent.

When Relational agreed to drop its slate, it also agreed not to acquire more than 9.99 percent of Intuit's stock over the next year. Shareholders with 5 percent of more of a public company's stock have to report their holdings and transactions. A 10-percent holder has a lot more obligations so, these percentages mean a lot. My betting sense tells me Relational probably had the ability to buy those other shares.

What does Relational see at Intuit? And with such a reputation for forcing change, it must see something. Standard issues have been boards dominated by the CEO or companies that are underperforming. Since Intuit has had an excellent reputation over the last few years, it's hard to guess what's at work.

Could the firm think Intuit has businesses that lie outside its strength? That its acquisition strategy is flawed? That some products are underperforming? That executive pay is out of line?
Facts are always subject to interpretation. This week, the Associated Press looked at the compensation given Intuit CEO Brad Smith for fiscal 2009 and said Smith's pay was cut by half.  I looked at the proxy and saw that Smith's salary rose to $4.8 million from $4.5 million.

His cash compensation was slashed because his bonus of $828,000 was down from $1.7 million. One of us is comparing apples to light bulbs. Or something. His stock and option awards made up for it.

There has been a tendency for the Intuit compensation committee to use superlatives in describing performance and that goes back to at least 2006 (I stopped looking) when Bennett was still CEO. Phrases such as "outstanding performance" in regards to either short-term or longer-term goals appeared in each year. Are they warranted? I don't know. A glance at a handful of other companies showed more emphasis on statistics.

No matter what, firms like Relational don't put this kind of money on the line to leave things the way they are.

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