Neuberger Berman Delivers Letter to Nuance Communications Board of Directors; Calls for Immediate CEO and Board Changes

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Alex Samuelson, 212.476.5392, Alexander.Samuelson@nb.com

NEW YORK, December 12, 2017 – Neuberger Berman, a global, independent, employee-owned investment manager, and certain of its affiliates that manage investment funds and client accounts that collectively own approximately 1.6% of the outstanding stock of Nuance Communications, Inc. (NASDAQ: NUAN) (“Nuance” or the “Company”) announced that it has delivered an open letter to the Nuance Board of Directors today. The letter was signed by Amit Solomon, Portfolio Manager, Neuberger Berman Intrinsic Value Strategies.

Neuberger Berman believes engaging in constructive dialogue with companies can positively influence corporate behaviors and drive long-term, sustainable returns for our clients. Our engagement with companies is guided by our governance and engagement principles (www.nb.com/esg.).

In the vast majority of cases, private dialog helps resolve our differences with companies in a constructive and pragmatic manner. However, following many months of private engagement with Nuance Communications, Inc., we have not received satisfactory responses to any of our concerns. At this point Neuberger Berman believes that it can only fulfill its stewardship responsibilities by making our engagement with the Company public.

The full text of the Neuberger Berman letter follows:

December 12, 2017

Robert J. Frankenberg
Lead Independent Director
Nuance Communications, Inc.
1 Wayside Road
Burlington, MA 01803

(By FedEx and email, and for public release)

Dear Bob:

We believe your primary responsibility as Lead Independent Director of the Nuance Communications Board of Directors is to ensure an orderly and legitimate executive succession. In a letter to the Nuance Board of Directors dated September 18, 2017, a copy of which is attached, we outlined our concerns regarding the publicly-announced CEO transition, corporate governance, and shareholder returns. On a call with you on October 16, 2017, you assured us that the CEO transition is on track and that investors will receive an update in short order, yet no meaningful public update has been issued to date.

The CEO transition was announced on November 17, 2016, with a commitment that Chairman and CEO Paul Ricci would retire at the end of March 2018. Over a year has passed and yet on the company’s earnings call on November 28, 2017, it was stated that there would be no material update on the search until 2018. The only detail that was provided by the retiring CEO was that he expected the search to be completed by the end of March 2018 implying implausibly little overlap between himself and the new CEO if the original commitment to shareholders is to be honored. The unusually long period of time taken for this search, the lack of meaningful updates, and several worrisome recent developments have led Neuberger Berman to lose confidence in the integrity and independence of Nuance’s management succession plan. We highlight the following points:

  • The failure to nominate a new CEO to replace Paul Ricci or to provide any material updates on the CEO search
  • The change of language in recent investor communications, with Mr. Ricci now stating he will be “stepping down” as CEO, rather than retiring as previously announced
  • The recent re-hiring of former Nuance CFO Tom Beaudoin to a newly created role of EVP of Business Transformation, reporting directly to the exiting CEO Mr. Ricci
  • The lack of accountability for the cyber breach – in contrast with the response of other company boards where notable breaches occurred (such as Equifax)
  • Significant shareholder opposition to long-tenured directors at each of the last three annual meetings

These facts lead us to believe that the Board, and in particular the Governance and Nominating Committees, act in deference to Mr. Ricci, who seems to have no intention to relinquish control of the company in March 2018, and may try to continue to exert influence as CEO, Chairman, or in another capacity. Given that Nuance’s stock price has lagged behind any measurable peer group or relevant benchmark over the last 10 years and that Nuance trades at a lower price-to-earnings multiple than any relevant peer, Mr. Ricci’s continued active involvement in any role will be a negative outcome for shareholders. We believe Nuance will be best served by an immediate severing of its relationship with Mr. Ricci.

To ensure independence of the succession process, we urge the Board to immediately appoint either Bob Finocchio or Mark Laret, the only two directors who have served for less than 12 years, as Interim Independent Chairman, and to appoint Bob Finocchio as Chair of the Governance Committee, replacing Katherine Martin. Ms. Martin should also immediately recuse herself from any CEO succession discussion – she should not be considered independent as she has served on the Board for 19 years, and is classified by ISS as an affiliated outsider because her firm received more than $4mm in fees from Nuance in 2016. A third of shareholders have also expressed reservations about Ms. Martin by withholding support for her candidacy at the last annual meeting.

Sincerely,

Amit Solomon
Portfolio Manager
Neuberger Berman Intrinsic Value Strategies

(Following is the full text of a previous Letter to Nuance dated September, 18, 2017 that was attached to above letter.)

September 18, 2017

Robert J. Frankenberg
Lead Independent Director
Nuance Communications, Inc.
1 Wayside Road
Burlington, MA 01803

Dear Bob,

Neuberger Berman has been a shareholder of Nuance Communications, Inc. (“Nuance” or the “Company”) since October 2012 and currently controls 5.2 million shares on behalf of our clients. As long term investors, we have grown increasingly concerned about the Board of Directors’ governance practices, oversight, and management accountability.

Currently, we are most concerned about the Board allowing Chairman and CEO Paul Ricci an unusual 19-month “lame duck” period to continue as CEO after he has already announced his plans to retire. And while that announcement was made in November 2016, there is still no formal update regarding the search for a new CEO, and no successor has been named.

During the aforementioned “lame duck” period, Nuance became one of the primary victims of the NotPetya malware attack. To our knowledge it is the largest technology company to have been materially impacted, with $240mm (or 9%) of on-demand contract value lost. Being hit by a malware is not an act of god; it’s a result of poor security practices and governance oversight. We are surprised no senior person at the company took responsibility for the incident, and believe responsibility begins at the top.

As I’m sure you are aware, Nuance has been a disappointing investment under Mr. Ricci, and the stock has substantially lagged peers and the broader market over the 1, 3, 5, and 10 year periods ending in August 31, 2017. This leads us to prefer that an outside leader be named CEO. But any new CEO should have latitude to set a new course for the company without being second-guessed by prior management. Given the Company’s poor performance, we would be very concerned should the board allow Mr. Ricci to continue as Chairman or even serve on the board after a CEO successor is appointed. We fully expect Mr. Ricci to resign from the board when a CEO successor is appointed and for the board to appoint an independent chairman.

In addition to these more recent issues, there are many governance areas that have concerned us for a long time: (1) the board has excessive tenure with six of eight board members serving for over 12 years, half of whom have served over 17 years. We believe such long-tenured directors can no longer be considered independent; (2) the board lacks critical expertise in the healthcare IT space, Nuance’s largest business; and (3) certain board members hold very little stock and have been sellers recently. We note that Glass Lewis and ISS criticized governance, independence, and pay practices and advised withholding votes against one or more directors in each of the last three annual meetings of shareholders. As we have discussed with you in the past, a refresh of the board is long overdue.

We are respectfully requesting to meet with you in person at your earliest convenience to discuss our concerns.

Sincerely,

Amit Solomon
Managing Director
The Greene Group

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