Yahoo's Microsoft Bid Rejection Raises Larger Corporate Governance Questions

Includes: AABA, C
by: Dan Braem

Yahoo (YHOO) CEO Jerry Yang will be slammed in the media over the next coming weeks. In my opinion, the criticism will be well founded. It is very tough to make an argument that Mr. Yang is acting in the best interest of his shareholders in rejecting Microsoft's (NASDAQ:MSFT) buyout offer. Personally, I cannot wait to see how long it takes the YHOO share price to reach $33. Good luck, Mr. Yang.

The MSFT/YHOO situation triggers deeper questions as to corporate governance in America. More specifically, what can regulators of U.S. companies enact that will allow shareholders to actually become owners of the companies. Here are some of my thoughts:

  1. If the boards of directors are to remain truly independent, how is it that the leaders of the boards can also run the companies? This is the equivalent of the President of the United States also becoming leader of the House and Senate. In my opinion, there have been some real questionable board of directors in the recent past – Citigroup (NYSE:C) is the first to come to mind. Would any truly independent board act the way they did with Chuck Prince.
  2. How many CEOs or directors of public companies serve with each other on more than one company’s board? The terminology in this case is “interlocking board of directors”. Time to get rid of this.
  3. Complete disclosure of board of director and executive compensation, including severance packages. Public disclosure is actually fairly good right now, but there is always room for improvements.
  4. Several ideas have floated recently about shareholders voting on executive compensation. Currently, I have mixed feelings about this issue. In some cases this may work, and in other cases this may be detrimental. In an ideal world, you would like a board to act independently and intelligently – this type of action may restrict a good board from making the right decisions and drawing the best talent. On the flip side, it may also restrict the “bad boards” from making egregious decisions.
  5. Currently, I don’t believe that CEOs and board of directors are personally accountable. In many cases, management has nothing to lose if bad decisions are made. If Jerry Yang was personally liable to YHOO shareholders for lost shareholder value, would he make the same decisions he is making now?

    The problem is that there is little recourse for shareholders when a company’s management behaves poorly. What if Chuck Prince had a clause in his contract that he would have to pay back Citigroup all his past and present compensation in the event of shareholder wealth destruction? Would he have managed the company in the same way? Most boards of directors have insurance whereby they are not personally liable to the shareholders. In many cases, shareholder lawsuits are made against the very corporations that the shareholders own. This seems like suing yourself – not very appealing. There are many legal questions surrounding this issue – however, I would like to see more discussion and academic debate on inventive ways of making CEOs and board of directors more personally accountable to the shareholders.

There are many good executives in the business world. I think most shareholders are reasonable and are not afraid of top executives receiving top dollar in the event that companies perform well. For example, I own shares in Goldman Sachs (NYSE:GS) – I am elated that a CEO can make 50 million dollars under the condition that Goldman is the best performing investment bank with unbelievable profitability. While I have not owned shares in Citigroup – I would not be elated that a departing Chuck Prince would receive a multi-million dollar severance. The key is truly aligning compensation with performance.

This does not mean issuing a CEO three million stock options a year under any circumstance, as some companies do. How would a CEO feel about receiving those stock options only after a year of his/her company performing well? There are many ways to attack the problems with corporate governance – it is my hope that some of them are addressed in the near future.

Disclosure: Long GS