Marvell Technology's Annual Shareholder Meeting (2011)

Last year, I attended Marvell Technology Group Ltd.'s (MRVL) annual shareholder meeting and praised President/CEO/Chairman Dr. Sehat Sutardja. Dr. Sutardja is Chinese-Indonesian, one of the most successful entrepreneurs in the world, and seems both calm and dapper at the same time. One doesn't see very many Asian CEOs, even here in Silicon Valley, and I view his success as proof that the American Dream is alive and well. Since last year's shareholder meeting, however, Marvell stock decreased about 14%, even as the NASDAQ increased about 26%. This year, I was looking forward to hearing why the company stumbled. I wasn't expecting epiphanies, but I could not have predicted a lack of direct answers to my questions; the company's VP of Worldwide Legal Affairs essentially cutting me off; and Investor Relations telling me after the meeting that if I published something "incorrect," I would be "liable."

It all began when I walked into the Hyatt Regency Hotel in Santa Clara, California. Like last year, the food was good--granola, yogurt, berries, water, and other healthy options. I appeared to be one of about six people present who were not working for Marvell. Dr. Sutardja handled most of the formal portion of the meeting and sat at a table in the front of the room with the VP of Worldwide Legal Affairs Thomas Savage and CFO Clyde Hosein. There were six shareholder proposals. At no point in time were shareholders given an explicit opportunity to ask questions or make comments about any of them. The polls opened, then closed shortly thereafter, and we were told that all of the proposals passed. (If North Korean government officials were in charge of shareholder elections, I imagine they wouldn't need to deviate much from Marvell's script.)

The lack of comment on the proposals was particularly interesting because several proposals seemed downright Orwellian. Proposal 5 reduces from three years to just one year the time period for a Director's stock/RSUs to fully vest. See pages 63-64, 10K: "[R]emove the requirement that awards of restricted stock, RSUs, and/or performance units/shares granted...shall not be fully vested until a minimum period of 3 years from the date of grant...Section 11(c)(ii) will be amended so that each Annual RSU Award will vest and become exercisable as to one hundred percent (100%) of the shares...on the earlier of the next general annual meeting or the one-year anniversary of the Annual RSU Award grant date." Basically, company Directors get an opportunity to make more money in one year or less, instead of gradually over three years.

Generally speaking, longer vesting periods incentivize longer term outlooks. For example, if you are supervising a company's officers, and you know your shares will fully vest in one year rather than three, you have an incentive to think in terms of one year performance (short term), not three year performance (longer term). The CFO later appeared to defend the shorter vesting period by arguing that the proposal applied only to Marvell's Directors. Presumably, he meant that officers, not Directors, run the day-to-day operations of the company and continued to be incentivized over the longer term. Yet, this change in vesting periods means the Directors are now incentivized differently than the officers of the same company.

Why is any of this Orwellian? Proposal 2 in the same 10K states, "Our primary business objective is to create long-term value for our shareholders." On the same page, Marvell highlights the company's long term focus: "Long-Term Focused: Promote a long-term focus for our named executive officers through incentive compensation." (page 58, 10K) In short, welcome to Newspeak--even as Marvell is changing its compensation policy to incentivize shorter-term performance by its Directors, it claims it cares most about long-term performance.

When the formal portion of the meeting was over, the company CFO, CEO, and attorney in front of the room failed to ask if anyone had questions. They simply got up and started walking off. I piped up--as I am wont to do when I see something unusual--and said I had some questions. I questioned the company's proposal to shorten the vesting period. The CFO said that viewed together with the other shareholder proposals, it was "logical" to shorten the vesting period. I responded that the proposal incentivized the short term over the long term. That's when I got the answer about the proposal only affecting directors, not officers. The CFO also added that stock compensation was not the primary motivator when deciding a company strategy, and stock prices move based on numerous factors--all of which is true, but why incentivize short term performance at all? Why not make directors hold onto options/RSUs/shares as long as possible before being able to cash out? I pointed out that Marvell's stock price had been abysmal compared to both the S&P 500 and the PHLX Semiconductor Index. Page 38 of Marvell's own 10K shows that while the S&P and SOX showed gains, Marvell's stock price declined by almost 50% during the time period shown. (Later, the Investor Relations contact told me I was "cherry-picking" dates--even after I pointed out I was just citing the company's own materials.)

Given the stock's relatively poor performance, I asked about specific plans for the future. I never got an answer that was satisfactory to me. Someone pointed out all the different markets Marvell was involved in. Good for you, I thought, before saying that mere involvement in different markets is different than being able to actually compete in those markets. I again asked for specific plans to turn around the stock price and asked how the company planned to compete. Dr. Sutardja said that Marvell had started out as a small company and had always managed to compete against larger companies and entities. I still hadn't received an answer that was satisfactory to me about specific plans, but Mr. Thomas Savage then told me I had used up my questions and asked if there were other questions from anyone else. No one else raised their hand, so I politely pointed out that no one had answered my question about the company's specific plans to improve the stock price. At this point, Mr. Savage essentially prevented me from asking further questions in the open format and closed the meeting.

Despite Mr. Savage's actions, Dr. Sutardja was kind enough to talk to me after the meeting. The CFO also chimed in, saying that answering my questions could take three hours, i.e., I was not asking questions that could easily be answered in a short period of time. Dr. Sutardja again reminded me that Marvell started out as a small company and was competing against large companies like Qualcomm (QCOM) and would continue to use "efficient implementation" to differentiate itself. Mr. Savage hovered close by while I was listening to Dr. Sutardja and exited the room with him before I could ask him what he meant by "efficient implementation." As I left the meeting, the VP of Investor Relations made a beeline for me and asked me pointed questions, trying to get an idea of who I was and where I was from ("Who do you work for? Are you with the press?"). I said the company's vague responses to my questions about specific plans did not inspire confidence, and I would be writing about my experience. He told me if I published anything "incorrect," I would be "liable." I asked him if he was threatening me, and he said he wasn't threatening me. I then left the meeting.

Marvell's directors, officers, and employees should realize their failure to provide information about specific turnaround plans is unacceptable when their stock price has drastically underperformed the relevant indices. Telling shareholders that the company has little control over its own stock price is no way to win over anyone. I doubt Marvell wants to hear any of this--but I will defer to George Orwell, especially in light of the company's comment that I may be "liable" for incorrect information: "If liberty means anything at all, it means the right to tell people what they do not want to hear."

Disclosure: I own an insignificant number of Marvell (MRVL) shares, and I do not plan on initiating any new positions within the next 72 hours.

Justice Hugo Black on State Secrets

Justice Hugo Black, concurring opinion, joined by Justice William Douglas, New York Times Co. v. United States (1971) 403 U.S. 713, 717:

The guarding of military and diplomatic secrets at the expense of informed representative government provides no real security for our Republic... [P]aramount among the responsibilities of a free press is the duty to prevent any part of the government from deceiving the people and sending them off to distant lands to die...

More here.