We Have Entered an Unprecedented Era of Shareholder Tolerance
It is interesting that corporate boards and institutional investors are willing to tolerate “Distracted CEOs” and founder CEOs who wish to exercise outsized control of the companies they founded. Both are examples of poor corporate governance.
Our definition of a Distracted CEO is the CEO that simultaneously holds more than one CEO post (example Jack Dorsey, CEO of Twitter and Square) and/or that has operating interests outside of his/her CEO responsibilities (example: Under Armour’s founder, CEO Kevin Plank). We recently covered this topic in CEORater Podcast Episode 100.
CEO Overreach is exemplified by CEOs and Boards that seek to solidify a CEO’s control over a company typically by issuing non-voting stock. Snap founder CEO Evan Spiegel and the company’s Board of Directors took a page out of Facebook’s book and issued Class A non-voting shares during the company’s March 2017 IPO (SNAP shares trade below the $17 IPO price and well below the stock’s $27 high).
Our General Questions:
- How does a public company Board of Directors justify its CEO having a second job?
- How do Boards quantify the Opportunity Cost associated with CEOs who simultaneously hold a second CEO post – especially when two publicly-traded companies are concerned?
- Why would institutional investors willingly allocate capital to companies led by Distracted CEOs and/or those guilty of CEO Overreach?
- Why would a Board of Directors and institutional investors allow a voting structure that enables founder CEOs to exercise outsized control?
- Why would the SEC allow an IPO to take place in which shares sold to the public are non-voting?
- Corporate Boards should not allow public company CEOs to have operating interests outside of the company. This includes investment activities such as family offices where the CEO may have a Board seat or may advise the office as to various holdings and investment strategy. This would not include trusts that manage family assets in passive investments (equity & fixed income securities), where the trust would not hold a Board seat for any of the securities in which it invests.
- Institutional clients (pension and retirement funds, etc.) should mandate that their respective investment managers refrain from investing in companies where the CEO is engaged in investing or operating activities outside of the company he/she leads.
- Institutional investors ought to push back on CEOs and Boards that seek to solidify power at the expense of other shareholders. Recently Facebook shareholders successfully pushed back on Mark Zuckerberg’s/Facebook’s previously announced initiative to issue non-voting Class C shares in an effort to retain control of the company while funding charitable initiatives with stock sales.
- The SEC should not allow IPOs that issue non-voting shares.
Examples of Distracted CEOs:
Jack Dorsey, founder & CEO of Twitter (TWTR) and Square (SQ). Simultaneously CEO of two publicly-traded companies.
- Stock still trades well below all-time high of $70.43;
- High senior executive turnover since November 2013 IPO;
- Has struggled to monetize the platform;
- Late to video and other features that may have helped better compete with Facebook (FB) / Instagram and Snapchat (SNAP) – two companies and three platforms that Twitter lags.
- Square’s stock has performed well since the company’s November 2015 IPO and year-to-date (up 151% during 2017). Where could the stock be were Dorsey focused exclusively on SQ?
Kevin Plank, founder & CEO of Under Armour (UAA). Plank also has a family office operation – Plank Industries – which includes various investment interests (commercial real estate, hospitality, food & beverage, venture capital and thoroughbred horse racing), outside of Under Armour as recently reported by the Wall Street Journal.
Under Armour (UA):
- Stock still trades well below all-time high of $51.85 in September 2015 (closed 12/29/2017 at $14.43, down 50% in 2017);
- Slow to innovate vs. athletic apparel giants Nike (NKE) and Adidas (ADDYY);
- Recently hired Patrik Frisk as President and COO. Potential CEO successor to Plank?
Examples of CEO Overreach:
Evan Spiegel, founder & CEO of Snap Inc. (SNAP). We covered Snap at the top of this note. Here is Snap’s prospectus which details the Class A non-voting share issuance.
Larry Page (CEO) and Sergey Brin (President), co-founders Google/Alphabet Inc. (GOOG). Google issued non-voting Class C shares in 2014. In addition, the company issued Class B shares which represent 10 votes per share and are not publicly-traded.
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