The View of Public Companies From 3000 Miles Away...

News Brief

By Cydney Posner

Here is an interesting column from The New York Times DealBook, commenting on the culture of the imperial CEO and Board obeisance -- in Silicon Valley.  The author contends that, in essence, these recently public companies in the Valley are really still run more like private companies.

In particular, the column calls into question the recent trend among newly public tech companies to maintain founder control through class A/class B capital structures that limit shareholder voting rights. The author speculates that the public may have been willing to buy into these arrangements because they assume that these public companies will have boards that "act independently. Directors are meant to act as a check on executives or at least add their expertise and advice to big decisions. In the Valley, however, the idea of the visionary chief executive dominates, and there may be little room for input from directors." The author then cites commentary from a speaker at the Stanford Directors' College, who "cast skepticism on the traditional board model" and suggested that the main function of the board "‘is to replace and compensate the C.E.O. Where the company has the resources to hire outside consultants as needed, it is not the board's role to offer counsel or advice.'" While the speaker reportedly backpedaled a bit from those remarks, the author maintains that the underlying sentiment is fairly common in the Valley, although it is "at odds with what corporate governance advocates and others suggest for boards. Today, boards are expected to be actively involved in supervising executives and participating in major decisions affecting the company." As an example, he cites reports that, in connection with the acquisition of Instagram, Facebook's CEO "reportedly told his board only about 24 hours before the deal was approved, appearing to present it as a fait accompli."

Compounding these attitudinal issues, the author argues, is the incestuous nature of these companies' boards: they are "tight and interlocking….These directors all work in the same environment, often invest in one another's companies and have little incentive to challenge the chief executive because it will affect their own ability to serve as directors or participate in the next big thing in Silicon Valley." The column also notes that the security provided by corporate control also means that these controlled companies are not subject to takeover threats, which he argues, can provide necessary discipline.

While the author struggles to provide an even-handed picture ("Maybe boards are overrated in Silicon Valley, where technology moves quickly, innovation is a must and decision-making must be fast and creative for a company to survive. ), it's clear that he favors the view "that a board willing to engage in vigorous debate prevents hubris and dumb decisions by chief executives… And the number of so-called visionary chieftains who made incredibly bad decisions is legion. A board can serve as a check on executives and prevent abuse. The conceit is that an actively involved board leads to better decision-making and outcomes, an idea heatedly debated in the world of corporate governance. An active board may be particularly important in these tightly controlled companies where ego may get the better of decision-making.

"So the new thing in Silicon Valley appears to be for public companies to be run as private ones without significant input from boards and shareholders. This leaves the wunderkinder of the Internet free to run their companies without interference. The question is whether this is merely a bubble in corporate governance or a trend that will spread to the rest of corporate America."

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