Yahoo Board Needs Replacements, Jackson Says

My chat with Erik Schatzker and Scarlet Fu from this morning about Yahoo!'s new CEO and their dysfunctional board:

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MarketWatch: SEC OK's proposal to give investors more say on TARP pay

SEC votes to approve new disclosure rule targeting conflict pay consultants

Jul 1, 2009, 5:26 p.m. EST

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) --The Securities and Exchange Commission on Wednesday voted unanimously to propose a rule giving shareholders a vote on the pay of executives at banks receiving funds from the federal government's bank-bailout program.

The proposal was part of a larger package of governance and disclosure rules under consideration by the agency. Commissioners at the SEC also voted to consider transparency rules to expand disclosure of pay packages and other governance matters.

They also approved, in a split, party-line 3-2 vote, a measure introduced by the New York Stock Exchange that prohibits brokers from casting director-election votes on behalf of investors that don't vote themselves. See full story.

"All three of these measures seek to enhance the quality of the system for each of 800 billion shares voted annually," said SEC Chairwoman Mary Schapiro.

Some institutions that haven't paid back the government money from its Troubled Asset Relief Program and will need to give investors a say on pay include Bank of America (BAC) , Citigroup (C) and other financial firms. J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, repaid TARP funds, in part, to avoid pay restrictions associated with the program.
TARP say on pay

The say-on-pay proposal would allow shareholders a non-binding vote on the pay packages of executives of financial institutions that have accepted funds as part of TARP.

The corporation is not required to follow the results of the vote, however a substantial vote against executive pay packages is likely to be embarrassing.

Such an approach, which Congress is considering for all U.S. corporations, would likely lead to more behind-the-scenes discussions between management and shareholders about executive pay packages.

Harvard Law School Professor John Coffee said the say-on-pay proposal is a harbinger of things to come because both Congress and the White House have expressed an eagerness to give shareholders of all corporations - not just TARP recipient banks - a say on pay. The House approved say-on-pay legislation in 2007 and lawmakers in both chambers are considering similar legislation.

"Both the House and Senate committees are going to go forward with say on pay," Coffee said. "And the Obama administration backs it as well."

Disclosure proposal

The agency also proposed new disclosure regulations, including a measure that would require corporations or dissident investors to provide more details in proxy disclosure documents about the business experience of director nominees.

Existing rules require only a brief description of the business experience director candidates have over the past five years. The agency will consider whether boards should disclose more details about why they choose a particular leadership structure.

The measure also requires corporations to provide more information about how its pay policies create incentives that impact the firm's risks and how management is controlling that risk. The measure also seeks improved reporting of stock and option awards in a compensation table based on fair value rules, which seeks to provide a more accurate sense of the officials pay at that time.

New disclosures about fees paid to consultants are also required in situations where the advisor or any of its subsidiaries provides other services to the company. The new proposal is intended to enable investors to consider pay decisions and assess any conflicts of interests a consultant may have in recommending pay packages.

Charles Tharp, vice president at the Center on Executive Compensation, said the say-on-pay rule is a step in the right direction, but more needs to be done. He said the SEC should revise its rules about what corporations need to disclose in their compensation tables to separate actual pay earned during the year, including salary and bonuses, from long term incentives.

"The current reporting of pay mixes actual pay with the accounting estimate of restricted stock and stock options that may or may not be earned, depending upon the company's performance in future years," Tharp said. "A clearer understanding of the relationship between pay and performance would benefit shareholders, compensation committees and companies."

Proxy fight disclosure -- an expedited approach

The measure also requires a corporation to disclose the results of an investor vote within four business days after the end of the meeting at which the vote was held. In many cases of contested director elections, when dissident investors nominate their candidates for election against management's slate of directors, corporations often delay release of results of elections for a week or a month after election.

David Sirignano, partner at Morgan Lewis & Bockius LLP in Washington, said that based on existing rules, corporations don't need to reveal to vote counts on disputed director elections and other matters until they release the corporation's next quarterly report.

"If they have a meeting on the first day of the quarter, the results don't have to come out until three months later," Sirignano said.

He said that in some cases it may not be practical to have corporations release the results of a contested director election within four days. He recommended requiring corporations to release the results four days after an outcome to the vote is determined, a process that could take ten days but would be significantly less than three months.

Eric Jackson, president of Ironfire Capital LLC, said Yahoo Inc. took two months to release the voting results for a "just vote no" campaign he launched seeking to oust directors at Yahoo Inc. in 2007. The meeting was in June and the results were released in mid-August.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

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TheStreet.com: The Activist Investor: Four Ways Icahn Can Beat Yahoo!

From TheStreet.com:

By Eric Jackson

06/04/08 - 09:12 AM EDT

Yesterday, Carl Icahn amped up the rhetoric in his battle to take control of Yahoo!'s(YHOO - Cramer's Take - Stockpickr) board, by calling for CEO Jerry Yang's head.

"I am amazed at the lengths that Jerry Yang and the board went to entrench themselves in this situation," said Icahn in the Wall Street Journal Tuesday. He added that he thought it was unlikely another bid by Microsoft(MSFT - Cramer's Take - Stockpickr) for Yahoo! would come as long as Yang was in charge.

So now that Yahoo! finally set the date for its annual meeting (Friday, Aug. 1 at the Fairmont in San Jose), the stage is set for 8 weeks of proxy fight fun.

Henry Blodget thinks Icahn's got a victory in the bag, saying he already has support from 30%+ of Yahoo! stockholders. He points to assumed support from Capital Research (due to previously critical comments made by Gordy Crawford of Yahoo!'s "so-called" independent board) and Legg Mason (LM - Cramer's Take - Stockpickr) (for similar reasons) and confirmed support from hedge fund heavyweights T. Boone Pickens, John Paulson, and Dan Loeb.

The problem with this math is that Gordy Crawford doesn't vote Capital Research's 16% Yahoo! stake himself. He oversees 6 of that 16%. The balance is overseen by Capital World Investors, which is led by Mark Casey in San Francisco. Cap World will vote for the path that will lead to the highest price per share. Legg Mason and many other larger institutional holders will also take a "show me" attitude to why Icahn's team will get them more money over the existing board.

I disagree with the "show me" line of thought and support Icahn's slate. As far as I'm concerned, after Yahoo!'s last four year's of slipped deadlines, missed opportunities and chronic market under-performance, the burden of proof should lie on the shoulders of the incumbent board and not an activist investor's slate that easily passes a credibility sniff test.

Icahn can win this proxy fight. Here's four steps he should take to ensure it:

1. Recount the Board's Many Mistakes: Icahn's biggest advantage in this battle is the horrible track record of Yahoo!'s board. It would be different if the botched Microsoft negotiations were a one-off. But Yahoo! has been in serious decline for four years. They've overseen a zero percent return for the shareholders over that time. They also monitored Yahoo! taking a pass on buying Google, Facebook, YouTube, and DoubleClick. The company's foray into becoming a mini-Hollywood studio was an aimless walk in the desert for years. And they also watched the company slowly integrate Overture's pioneering paid search technology, allowing Google to surge ahead of them for good.

Supporters of Yahoo!'s board say that they have more relevant Internet experience than Icahn's slate. What good is Internet experience if you've presided over so many mistakes for so long? What good is having supposed deal-makers like Chairman Roy Bostock and others on this board if they haven't been able to consummate a deal?

2. Point out Jerry Yang and the Management Team as In Over Their Heads and Co-Creators of the Problems: Jerry Yang and President, Sue Decker, appeared last week at the All Things D Conference last week in Carlsbad, Calif., looking solemn and lacking any energy or clarity in explaining what Yahoo! does and what it wants to be assuming it stays independent.
This management team had more than seven months after Terry Semel resigned and before Microsoft launched its offer to set Yahoo! on a new course. They didn't do it, choosing instead to pretty much stay the course Terry had been on. In retrospect, it's not surprising, as Yang, Decker, David Filo, Brad Garlinghouse, and Jeff Weiner are long-timers.

How can this team be entrusted to fix Yahoo!, when they were the ones who broke Yahoo!?

3. Raise the Issue of Director and Executive Compensation: Executive Compensation has dogged Yahoo! as an issue for years. Shareholder ire on this was typically directed at Terry Semel and the Compensation Committee who paid him. Yahoo! was handing out top decile pay for market under-performance in the last years of his tenure.

You might have thought that the issue would die when Semel agreed to step down last year, after each of the Comp Committee directors (Bostock, Ron Burkle, and Art Kern) received 35% of shareholders votes cast against their re-election.

A quick comparison of Yahoo!'s newly released preliminary proxy and Google's from several months ago shows that Yahoo!'s independent directors were paid, on average, nearly twice as much in total compensation last year as Google's independent directors ($497,812 vs. $260,854).

All of this compensation was paid out in stock grants and stock options, yet these lavish packages have an economic cost to current stockholders. This isn't play money. It's painful to Yahoo! shareholders to think that these board members were paid $4.4 million last year collectively and that led to these kinds of results.

Yahoo! directors and officers continue to be addicted to excessive stock compensation.

4. Prove You Can Get a Higher Price for Yahoo! than its Foot-Dragging and Feigned Indifferent Board: This is the biggest nut that Icahn must crack in the eyes of key swing voters. He is unlikely to get public support from Microsoft in advance of the Aug. 1 meeting. So, on his own, he will have to articulate how he can get more for shareholders than the other guys. Without a firm offer from Microsoft in hand, some shareholders will simply not believe Carl.

However, enough shareholders can and will support Icahn if he points to how he's knocked heads before to get a better deal done (BEA and Oracle being the most recent and relevant example).

He can also always turn this critique around to ask why the existing board has persistently turned its nose up at a potential deal with Microsoft (according to recent unsealed documents coming out of the shareholder Delaware Chancery Court case against Yahoo!).

There are many reasons why Icahn might not want to win this proxy contest.

Thanks to Yahoo!'s Feb. 12 approval of poison pill-like "Change of Control" provisions, Icahn himself could trigger these if he wins five or more board seats.

The new leadership of Yahoo! would be hamstrung from changing anyone's job titles without expensive severance, benefits, accelerated vesting, and other services kicking in. There would also be rapid departure of the most senior and expensive executives.

It's not right, but this scenario will factor into to Capital World's and Legg's thought process as they weigh how to vote their shares.

There's a clear solution for all parties involved: get a deal with Microsoft done before Aug. 1.

Yahoo!'s directors don't want further embarrassment to mar their reputations. Icahn and other Yahoo! shareholders can get back to a full and fair price for their shares. And Microsoft can get out of their two-year Yahoo! purgatory (since they first privately floated the idea of a deal in mid-2006 to Yahoo!) and get on with beefing up their anemic Online Services Division and protecting their core Desktop cash cow with Web services and advertising revenue.

[Disclosure: At the time of publication, Jackson was long Yahoo!]

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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