Former Autodesk CEO Carl Bass has his say on activist investors

Carl Bass was Autodesk’s CEO for more than a decade and worked at the software company in various roles for more than two decades only to resign suddenly in February 2017.

Bass was rumored to have left after criticizing President Donald Trump, but he later said that he and the Autodesk board had in fact started succession planning talks 18 months before he resigned. But the process was suspended in the fall of 2016 when two activist investor groups — Sachem Head Capital and Eminence Capital — together bought an 11.5 percent stake in the company.

Bass was willing to remain in his role during the ensuing battles — facing a “worthy adversary” until the activist investors left, as he said in a new podcast with Andrew McAfee — but the differing philosophies about how to run Autodesk have stuck with him.

“If you have conviction about running the company, buy it and you run it,” he said. “This idea that you're an itinerant owner — that would be like me getting a room at the Motel 6 and then telling them they have to redecorate everything, and then the next day I leave. It's a crazy notion that we've gotten to.”

In his conversation with McAfee, co-director of the MIT Initiative on the Digital Economy, Bass described how activist investors changed Autodesk, compared the company’s situation to headline-grabbing takeovers of Mylan and Valeant Pharmaceuticals, and shared his opinions on the role of shareholders in public companies. The podcast was recorded in December 2017.

Different thoughts on ROI
In 2015, Autodesk announced a change to a subscription-only licensing policy. Bass said he knew this would have a negative impact on short-term financial results, just as similar licensing moves had affected Adobe and Microsoft, but that the long-term impact would be “a stronger, more resilient business model.”

The activist investors moved in right when Autodesk was entering its trough, Bass said. He and the Autodesk board had a long-term plan, and they had faith that it would work, but the investors had a very short-term plan.

The strategy was to cut research and development costs, which Bass called typical move for activists investing in a software company. This makes money in the short term, but the lack of investment and vision hurts companies in the long term, he argued.

“I think the truth of the matter is, they would like to argue they're in the value-creation-return-to-shareholders business, [but] I would say they're in the wealth-transfer business,” Bass said. “They're transferring value from the future shareholders and the corporation to themselves. It's like getting you to pay off your mortgage now, and then people down the road have to pay the costs of that.”

Destructive and criminal scams
As difficult as the Autodesk takeover was, Bass described other high-profile activist takeovers, particularly those involving pharmaceutical companies such as Mylan and Valeant Pharmaceuticals, as “hugely destructive things.”

Mylan was subject to Congressional scrutiny for a 400 percent price increase over 10 years for its EpiPen, a lifesaving injectable drug for patients with severe allergies.

Valeant saw its share prices increase by nearly 2,500 over seven years. This led to a hedge fund takeover bid, which triggered allegations of insider trading, faulty accounting, and Valeant’s near-bankruptcy. CEO Michael Pearson lost his job and his fortune, the majority of it tied to stock and options that Pearson would only receive if Valeant grew at a pace possible only by hiking drug prices 800 to 1,700 percent.

“This is where you have to be careful — for each statistic there's an equal and opposite statistic. There are parts where Valeant looks like the greatest company on the planet,” Bass said. “I can't tell you the number of activist shareholders who came into us and told us that the model we should follow at Autodesk for things like executive compensation was the one at Valeant.”

Opinion pieces in publications such as “The Wall Street Journal” may argue that the work of activist investors benefits shareholders, but, said Bass, “In the end, it was certainly a scam and criminal.”

Shareholders are not owners
Bass said executives need to realize that serving shareholders is not just about short-term profits but, rather, about building a business with long-term sustainability.

Milton Friedman’s theory [PDF] that a company is owned by shareholders — big and small, activist or not — is a “legal fiction,” Bass said. “What a shareholder really owns is stock, which is a contractual agreement between the company and that shareholder.”

Bass elaborated with an example from his latest role after Autodesk: Running a workshop in the Bay Area where he builds furniture and sculptures, much like he did before he got into the software business.

“I own my metal shop. I can do whatever the heck I want in here,” he said. “I own Apple stock. That does not allow me to walk into the Apple store down the street and grab a bunch of iPads because I think, ‘Hey, I have 100 shares of Apple stock.’ That shows the difference in what ownership is and who you're working for.”