Wednesday, August 06, 2008

After Vote-Gate, Heads Must Roll on Yahoo’s Board

By Eric Jackson
Managing Member, Ironfire Capital LLC
August 6, 2008

To anyone who says that it’s inconsequential that Yahoo understated the level of shareholder dissatisfaction by more than half thanks to a “tabulation error” by its proxy counter, Broadridge–I say: You couldn’t be more wrong. This incident will have ramifications in the coming weeks for the composition of Yahoo’s board. But here’s the shocking thing: This latest batch of numbers might still underrepresent the level of disdain shareholders have for this board.

Any corporate election that doesn’t receive 95 to 98 percent support from shareholders for the incumbent management and board is an anomaly. Yahoo’s first press release from last Friday suggested that, despite all the hubbub of the failed merger talks with Microsoft and public criticism from Carl Icahn and others, Yahoo shareholders had let the incumbents off the hook. Chairman Roy Bostock and CEO Jerry Yang were re-elected with 79.5 percent and 84 percent support respectively. These relatively benign results (compared to last year’s), combined with the fact that there were not more pointed questions at the meeting last week, led some observers to conclude that this board had “faced down” its critics.

Not quite. Gordy Crawford of Capital Research Global did all Yahoo shareholders a favor by demanding a recount. Yahoo and Broadridge complied. And results of that recount were alarmingly different from the first set of numbers. We’ve all heard of +/- 4 percent in polling, but when was the last time you heard of +/- 50 percent?

The recount might set a modern-day record among S&P 500 companies for the most “withhold” votes for a board in a corporate election. Only V.J. Joshi, head of HP’s Printer group, got off without a serious warning from shareholders (a 7 percent “withhold” vote). The “withhold” vote for Bostock was 39.6 percent, not 20.5 percent as originally reported. And 33.7 percent of Yahoo shareholders withheld their support from Yang, not 14 percent. Other Yahoo directors who fared poorly in the election were Gary Wilson (27.7 percent of votes withheld) and Compensation Committee membersRon Burkle (37.9 percent withheld) and Art Kern (31.1 percent withheld).

What would we all be doing today if Gordy Crawford had never called for a recount? If a “tabulation error” happens and no one is there to hear it, did it happen at all? We will never know.

And there will likely be more shoes to drop in this tragedy of errors. This “tabulation error” was only one of two major question marks surrounding last Friday’s initial voting results. Yahoo easily made Broadridge the fall guy for this first error. The second error–how few eligible shares were counted in the final tally–isn’t so easily eluded. And for that, Yahoo will be the fall guy.

Only 75.8 percent of the eligible shares as of the June 3 record date were voted in this election. After such intense media scrutiny in the past few months, it seems odd that so few investors participated.

Last weekend, I dove into the numbers in detail and reviewed them against numbers from the last two Yahoo elections. On Sunday night, I wrote about the most recent Yahoo shareholder vote, and verified that there were 200 million fewer votes cast this year compared to the average over the last two years. I called on Yahoo to appoint an independent third party to review and certify the voting process.

Yesterday, as news of the voting irregularities circulated, I received a number of complaints from frustrated shareholders. Some claimed they had received multiple proxies from Yahoo over the last month, with several arriving Aug. 4–the Monday after the election. Some said they had had trouble voting by phone. Others, who had initially voted for Icahn’s slate, said when they tried to re-vote against the Yahoo board, they weren’t able to do so. How many other shareholders encountered similar difficulties? Without a full inquiry, we’ll never know.

These missing votes could have had an even more significant impact on the overall results. For example, Chairman Roy Bostock received “for” votes from fewer than half of the total shares eligible to vote (only 45.8 percent of the 1.4 billion shares eligible to vote). He truly lacks the approval of the majority of the shareholders he is supposed to represent. With a 47 percent vote, director Ron Burkle also lacks majority support. And while CEO Jerry Yang won majority support, he did so by the skin of his teeth, with just a 50.2 percent vote.

Governance Matters

At Friday’s meeting, I asked Jerry Yang, Yahoo President Sue Decker and Roy Bostock about three issues that suggest to me that Yahoo’s governance oversight has been lax.

(1) Why did Yahoo sell Overture Japan (a $396 million-per-year business) to Yahoo Japan for $13 million last August? Did Yang, who sits on Yahoo Japan’s board, recuse himself from the negotiations? Who negotiated on behalf of Yahoo and why did they agree to such a low price when Yahoo has a habit of paying three-to-five times revenues for companies like Zimbra, Blue Lithium, and Right Media?

(2) Sue Decker serves on three Fortune 500 boards (Intel, Costco, and Berkshire Hathaway). Her duties to those companies required her to attend at least 22 meetings last year, according to proxy filings. And each meeting required significant preparation. As a Yahoo shareholder, I fail to see how outside commitments like these benefit Yahoo. Are they really necessary? Shouldn’t Decker drop a few of them until Yahoo finds solid footing again?

(3) About a third–31-36 percent–of Yahoo shareholders voted against the re-election of Roy Bostock and fellow Compensation Committee members Ron Burkle and Art Kern last year. Yet all three continue to sit on this committee (or the Board). Why? And why did they agree to pay outside directors average total compensation of $500,000 last year? Google’s outside directors were paid $250,000, on average, for their services last year. Sue Decker received $2,700 for sitting on the Berkshire Hathaway board (and $110,000 per year for serving on the Intel and Costco boards). Why is Yahoo paying its directors so much?

I found the trio’s answers to these questions unconvincing. Particularly surprising were Bostock’s comments on Compensation Committee member tenure and compensation.

In the first place, Bostock said while 32 percent of shareholders voted against his reelection last year, 68 percent voted for him. And that’s not bad, he said. This glass-half-full logic explains why he has never bothered to explain to shareholders why he, Burkle and Kern have remained on the Compensation Committee and the Yahoo Board.

Second, Bostock disputed my assertion that Yahoo’s outside directors were paid an average of $500,000 last year. When I asked him if he was definitively stating that he did not receive compensation of about $500,000 last year, he said “yes.” Yet, according to Yahoo’s own proxy statement, Bostock earned total compensation of $499,264 last year. 2007 compensation for Yahoo’s other board members was as follows:
  • Ron Burkle: $482,046
  • Eric Hippeau: $496,674
  • Vyomesh Joshi: $519,520
  • Art Kern: $496,990
  • Bobby Kotick: $492,774
  • Ed Kozel: $516,202
  • Mary Agnes Wilderotter: $205,832 (for five months of service; annualized $493,997)
  • Gary Wilson: $482,046

The average compensation for each Yahoo outside director in 2007: $497,531.

Third, Bostock also claimed that this year’s vote would be a far better indication of shareholder support for Yahoo’s Compensation Committee than last year.With 39.6 percent of shareholders withholding support from Bostock and 37.9 percent withholding it from Burkle, isn’t it time for them to step aside?

Fool Me Once, Shame on You; Fool Me Twice, Shame on Me

Given all this, I am deeply concerned that my interests and those of all Yahoo shareholders are not being protected by the company’s board. We need to know why 200 million shares were missing from this year’s vote as compared to the last two years’. We need to know why so many proxies were mailed late to shareholders (on our dime). We need to know why so many shareholders are questioning whether their votes were counted. Yahoo will try to sweep all these concerns under the rug, but we shouldn’t allow it. The company should immediately appoint an independent third party to address these questions and assure shareholders that their votes were properly counted.

Immediate Changes to the Board

Also, Yahoo needs to immediately make some changes to the composition of its board. Roy Bostock and Ron Burkle should do the honorable thing and step down from this board.

In truth, this should have happened a year ago. One wonders what might have happened in the last 12 months with Microsoft negotiations had Yahoo acted swiftly, following the 2007 annual meeting, to remove them.

Eric Jackson is the Founder and Managing Member of Ironfire Capital LLC, an activist hedge fund. In 2007, he founded the "Yahoo! Plan B" group, a web-based group of 150 Yahoo shareholders who own more than 3.2 million shares in a campaign to change the company’s direction.

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