Monday, December 04, 2006

Memo to Yahoo’s Board: Fire Semel

This is taken from this morning's edition of Matt Marshall's VentureBeat:

Recent troubles have engulfed Yahoo! with the sharp earnings miss relative to Google, delays on the Panama advertising platform roll-out, slowing growth rates, and low-level VP Brad Garlinghouse’s now infamous “Peanut Butter Manifesto” leaked to Kevin Delaney and Page One of the Wall Street Journal and highly critical of Yahoo!’s management. TechCrunch now says that Michael Marquez is leaving and Xie Wen left their China group last week.

Criticism has taken many forms. Some are saying that nothing is wrong at Yahoo! except for better monetizing its traffic, and others that Yahoo! needs to more dramatically upgrade the quality of its search and embrace "de-portalization" of itself. However, most of the criticism in the wake of the leak has been directed at Chairman and CEO Terry Semel. It really should be directed at Yahoo’s Board, which -- to this point -- has escaped any mention in press coverage of the tech giant.

Boards serve many functions but their most basic job is to hire and fire the CEO. It’s time for Yahoo!’s Board to fulfill its responsibility to its shareholders, users, and employees by firing Terry Semel and hiring someone else to get the company back on its footing.

In April 2001, Yahoo!’s Board hired Terry Semel. After the go-go days of the late ‘90s and a relaxed culture under its first CEO, Tim Koogle, the Board chose a 24-year Hollywood power broker. Semel was to bring marketing and focus to the company and inimitable connections with the old media content providers that could be harnessed by Yahoo! He has overseen a dramatic turnaround in Yahoo!’s stock price from $4.05 at its nadir to $26.50 today.

Yet, chronic complaints about ‘silos’ of competing groups after many acquisitions, lack of vision for where the company is going, some acquisition hits (e.g., Flickr, but many misses (e.g., DialPad) and several notable bridesmaid non-moves (e.g., not doing deals with Facebook, MySpace, YouTube, or AOL), and general unease from within the ranks about where Yahoo! is going suggest that Terry Semel’s best days at Yahoo! are behind him. The company needs fresh eyes at the helm to avoid Yahoo! languishing only to be ignominiously acquired by a Microsoft or merged with an eBay down the road. Yahoo!’s shareholders, users, and employees deserve better and the Board should do its part.

Here is a short-list of what Yahoo’s Board needs to do now:

1. Fire Terry Semel. He’s lost his credibility to lead and he’s approaching 64 after 5 years in the job. There was a time for Tim Koogle to go, now is the time for Terry to go.

2. Hire a Credible Successor. Yahoo! employees and shareholders need to believe in this person. He/she must be able to clearly articulate a vision for where the company is going, fix the internal inefficiencies which exist, and drive a culture that ensures personal accountability. I recently suggested Susan Decker fits the bill. Vishesh Kumar of has speculated to me that Jerry Yang might make a good fit. There are also many able external candidates.

3. Install a new “Presiding Director.” It’s admirable that Yahoo! took the step of creating the role of “Presiding Director” to constructively challenge its CEO and ensure sufficient debate on the Board. However, if I was Robert A. Kotick, the current “Presiding Director” who is also the full-time Chairman and CEO at Activision – brought in by Semel 2 years after Semel’s appointment and 20 years Semel’s junior – I would find it difficult to speak out in Board meetings against Semel. There is a natural deference to "the one who brought you to the dance." A new approach is needed in this important role.

4. Demand that all Yahoo! Directors buy meaningful amounts of YHOO stock. Yahoo! requires all its executives to buy and hold 3000 shares of stock, and it suggests its Directors own 12,000 shares of stock. Yet, as mentioned in an earlier post, these can be as a result of generous stock options or grants from Yahoo! At the moment, all outside directors are well above 12,000, thanks to these options. The problem with grants and options is that they are treated as "found money." Our research shows that companies where the outside Directors dig into their own pockets -- putting "skin in the game" -- and purchase meaningful amounts of stock enjoy significant returns compared to their industry returns in subsequent years.

5. 10-Year Term Limits for Yahoo! Directors. It’s inevitable that even the best Directors become a little stale in the saddle after a certain amount of time. You simply can’t continue to see the company with fresh eyes. The best Boards rotate in new talent in an orderly way. In the case of Yahoo!, two of its ten Directors just celebrated their tenth anniversary on the Board: Eric Hippeau and Arthur Kern. Yahoo! defends this in their governance policies by saying: "While term limits could help insure that there are fresh ideas and viewpoints available to the Board, they hold the disadvantage of losing the contribution of directors who over time have developed increasing insight into the Company and its operations and therefore provide an increasing contribution to the Board as a whole." Yet, several respected scholars have found definitive evidence that tenure leads to an increased commitment to past decisions and a lack of willingness to try new approaches. Besides, Yahoo!'s board can always ask Messrs. Hippeau and Kern to come back from time to time as consultants to the board, so they can tap into their insight, if necessary. While they have served the company well, it’s time for some new blood.

6. Ask all Yahoo! Executives not to serve on other Non-Internet Boards. Although it symbolizes how well she is thought of by F500 companies, Yahoo! shareholders, employees, and users do not directly benefit from Susan Decker spending time each quarter as a Director for Costco and now Intel. Her professional time should be 100% focused on Yahoo!’s problems and solutions -- not on reviewing the quarterly board packages for Costco and Intel. One response to this suggestion might be that serving on these boards is good for Ms. Decker, as it exposes her to new ideas and practices that she can bring back to Yahoo!, making her less insular. I respectfully disagree. In this post-SOX world, serving as a Director is a major time commitment and there are many able non-executives to fill the need. There are also many other ways that Susan Decker can stay abreast of new trends and practices in her current role without being a Director elsewhere, guarding against a closed-minded view of the world. There is also evidence in this study that executives serving on boards of other companies (like Costco) that are outside the "computer" industry are bad for the home company's stock price.

It’s been over two weeks since the “Peanut Butter Manifesto” appeared in print for all to read. To this point, the Board and Yahoo! have remained silent on it. The Board needs to move swiftly to replace Terry Semel with someone else who can go through the necessary and difficult work of breaking down the internal silos that exist at Yahoo! and drive it through its next stage of growth. This is not a quick-fix. The new CEO will need time to facilitate this make-over.

However, Yahoo’s Board has two choices: (1) proactively move to get someone in place to do this necessary work or (2) wait for the many willing activist hedge funds (like Bill Ackman at Pershing Square, Bruce Sherman at Private Capital, Ralph Whitworth at Relational, Eric Knight at Knight Vinke, Eric Rosenfeld of Crescendo Partners, Barry Rosenstein at Jana, or Carl Ichan) to accumulate positions in Yahoo!’s stock above a certain threshold when they will dictate their terms to Yahoo! and change its Board composition themselves.

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loosecannon said...

Yahoo is suffering from very large abuses of exective stock options and Semel is the biggest. He's cashed in a net $450,000,000 and holds another $260,000,000 in ESOs much of which he will take with him if he leaves.

If the next CEO is offered an options package similar to the one that Semel got to start work (Fair Value over $100,000,000) the company's earnings will never overcome that expense.

So Yahoo is stuck unless they do something about their ESO abuses.

loose cannon

Unknown said...

I knew about the $450MM but not the additional in ESOs. Thanks for the comment, Eric