Wednesday, June 13, 2007

BusinessWeek: Yahoo's Semel Faces the Music

From today's BusinessWeek:

At the annual meeting, shareholders made their dissatisfaction known, with votes on directors and executive pay

by Robert Hof

As Dottie Weber ambled into Yahoo!'s annual shareholder meeting on June 12, she was expecting fireworks. "It's going to be an angry meeting," predicted the self-described "small" Yahoo investor, who noted that Yahoo's stock has been languishing for more than a year as it has lost ground to archrival Google (GOOG). "A lot of shareholders are fed up. I'm thinking of selling."

Contrary to her prediction, the meeting proved rather sedate, as fewer than 150 shareholders attended and only a few spoke up to criticize the company. Nonetheless, no small number made it clear with their proxy votes that they're unhappy with Yahoo's (YHOO) lagging stock price—down 20% from its 52-week high of $33.74 in July—and Chief Executive Terry Semel's $71.7 million pay package last year. Nearly 33% of stockholders opposed the reelection of at least one Yahoo director.

While that means the slate was reelected, the preliminary vote indicates that investors heeded various shareholder advocates who called for "withhold" votes on some directors. Three shareholder advisory firms—Institutional Shareholder Services, Glass, Lewis & Co., and Proxy Governance—recommended opposing directors Roy Bostock, Ron Burkle, and Arthur Kern, who make up Yahoo's compensation committee. The groups said Semel's pay package was excessive given Yahoo's recent performance.

Shareholders Send a Message

The withhold votes stand out among shareholder votes of the past year, says Patrick McGurn, executive vice-president at ISS: "That's one of the higher no votes on directors that we've seen."

Moreover, nearly 35% voted for a shareholder proposal to tie executive pay more closely to company performance. While that's about average for such proposals lately, says McGurn, the vote indicates the pay issue struck a chord with a significant number of investors. Indeed, when David Collins of the United Brotherhood of Carpenters Pension Fund introduced the proposal, it was greeted by widespread shareholder applause at the meeting.

In response to a question from BusinessWeek after the meeting, Semel said the company had expected the votes because of the shareholder groups' recommendations. But Naples (Fla.) management consultant and small Yahoo investor Eric Jackson, who has mounted a high-profile campaign to remove those and other directors, says the votes sent a clear message that shareholders are impatient for better results. He said he hoped Yahoo founders and "Chief Yahoos" Jerry Yang and David Filo would respond and take a more active role in getting Yahoo back on track. Says Jackson: "I don't think there's any way that Jerry and David can ignore that."

External and Internal Challenges

The rising tide of rebel shareholders at Yahoo is emblematic of a national trend. Investors are demanding and in some cases winning changes in how directors are elected. They're also voting in increasing numbers for nonbinding votes on executive pay packages (see, 6/11/07, "Activist Investors Get More Respect").

But Yahoo in particular also has been struggling with an array of its own challenges. Despite the release this year of a new search advertising system, called Panama, it has been unable to show it's catching up with Google on search ads, the fastest-growing online ads. Yahoo's revenue grew 7% in the first quarter, compared with a 63% jump in sales at Google.

Partly as a result, Yahoo has seen a steady stream of executive and employee departures. That has put a damper on morale since last year. What's more, the struggles have renewed persistent speculation about whether Semel will stay in the job he took in May, 2001 (see, 5/28/07, "Even Yahoo! Gets the Blues").

Playing Offense and Defense

Semel didn't shed light on that, but his presentation at the meeting sought to reassure investors that Yahoo is on the right track. While "we have a lot more to do," he conceded, he said Yahoo still has a good competitive position. In particular, he implied that the investments in Panama and other initiatives will pay off soon and help it regain ground lost to Google. "Without any question in our mind, we are going to narrow that gap," he said. "We would have loved to do it a little sooner. [But] that's going to be a lot better business for Yahoo going forward."

Semel faced the sharpest criticism from Jackson, who told Semel, "I'm surprised that you didn't apologize to the Yahoo shareholders for the past three years' performance." He grilled Semel on how specifically he was going to execute Yahoo's strategy, concluding with this pointed question: "Do you still have the fire in the belly?"

Semel responded calmly: "Absolutely." He displayed annoyance only once, when Jackson asked whether Semel was admitting he was satisfied with Yahoo being No. 2 in search. "I think you're being a little cute about that," he said, denying any such admission. Afterward, Jackson said he's still waiting for more specifics. "We all want to know why we should stick around as shareholders," he said.

For their part, analysts also say they'll be paying close attention to what Semel has to say when Yahoo reports second-quarter earnings on July 17. "Management did draw a line in the sand," notes Rob Sanderson of American Technology Research. Yahoo will be expected to start reporting double-digit gains in the amount of revenue it gets per average search query, as executives have promised. Otherwise, he says, investors may clamor for more drastic changes at Yahoo.

Hof is BusinessWeek's Silicon Valley bureau chief.

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