Starboard Value Challenges Box Leadership

Starboard Value, a prominent activist investor, has voiced significant discontent with Box, the cloud content management vendor, articulating its concerns in a publicly released letter yesterday. Having acquired a 7.7% stake in Box two years prior, the firm alleges underperformance, deficient execution, and unfavorable business choices, and is now advocating for changes to the composition of the board of directors.

Frustration with Performance

Despite maintaining a generally courteous tone, Starboard’s letter clearly conveys its exasperation with Box’s current trajectory. “We have grown increasingly frustrated with continued poor results, questionable capital allocation decisions, and subpar shareholder returns,” Starboard stated, referencing ongoing dialogue with Box’s management and Board of Directors over the past two years.

Box's Response

Predictably, Box responded defensively to this public criticism, issuing a press release asserting its willingness to accommodate Starboard’s input. The company highlighted recent board refreshes, noting that several new members – approved by Starboard – were added last year.

Box emphasized the strength and diversity of its current board, stating: “Box has a diverse and independent Board with directors who bring extensive technology experience across enterprise and consumer markets, enterprise IT, and global go-to-market strategy, as well as deep financial acumen and proven track records of helping public companies drive disciplined growth, profitability, and stockholder value.” Seven of the ten directors have joined the board within the last three years, according to the company.

Controversy Surrounding KKR Investment

A recent $500 million cash infusion from KKR has drawn particular scrutiny from Starboard. The firm views this financing as a maneuver to bolster cash reserves, potentially for acquisitions. However, Starboard strongly criticized this move, labeling it a “shameless and utterly transparent attempt to ‘buy the vote’,” and a demonstration of disregard for sound corporate governance and fiscal responsibility.

Analyst Perspective

Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis, a content management market research firm, believes a fundamental misalignment exists between the two parties, and a resolution is unlikely. He explained, “Starboard targeted and gained a seat on the board at Box at a difficult time for the firm, that’s the modus operandi for activist investors.”

Pelz-Sharpe continued, “Since that time there has clearly been a lot of improvements in terms of Box’s financial goals. However, there is and will remain a misalignment between Starboard’s goals, and Box led by Levie as a whole. Though both would like to see the share price rise, Starboard’s end goal is most likely to see Box acquired, sooner rather than later, and that is not Box’s goal.”

Call for Further Board Changes

Starboard contends that further board changes are essential to rectify the situation, implicitly criticizing the current Box leadership. “There is no good reason that Box should be unable to deliver improved growth and profitability, at least in-line with better performing software companies, which, in turn, would create significant shareholder value,” the firm asserted.

Consequently, Starboard announced its intention to nominate its own slate of board candidates at the upcoming board meeting. Box responded in kind, indicating it would also present its own nominees.

Box Defends its Progress

Box vigorously defended its recent performance, highlighting progress made under the oversight of its Operating Committee. “In the past year, the company has made substantial progress across all facets of the business — strategic, operational and financial — as demonstrated by the strong results reported for the full year of fiscal 2021,” the company stated.

The company pointed to its revenue growth as evidence of this progress, reporting $771 million in revenue, an 11% increase year over year.

Potential Outcomes

The outcome of this dispute remains uncertain. Starboard aims to gain control of the Board and implement its own strategies for Box, believing it can unlock greater value. As Pelz-Sharpe suggested, this could ultimately lead to an acquisition of Box.

A showdown appears imminent, and the resolution could fundamentally alter Box’s direction. Alternatively, the current leadership may successfully defend its position and continue pursuing its existing growth strategy. Only time will reveal the ultimate result.