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Hypocritical Yahoo! Says Icahn Fit to Serve as Director But Loeb Isn't

This article is more than 10 years old.

Within the last 6 months, Dan Loeb's Third Point hedge fund has become the largest institutional investor in Yahoo! (YHOO).  His combined stake in the company is worth over $1 billion and it's his fund's single biggest position.

In short, he cares greatly about what happens to the company.  He doesn't want to see it aimlessly tread water for the next few years or decline in value.  Unlike Terry Semel, Carol Bartz, or Scott Thompson, he doesn't get paid a lot of money regardless of whether or not the stock goes up or down.  Loeb -- and every other shareholder in Yahoo! -- only makes money from their investment when the stock price increases.

Because Loeb has a lot of skin in the game, he's approached Yahoo! over the last few months asking to serve on the board and he's suggested some other nominees qualified to serve on the board to fill what were open seats after co-founder Jerry Yang left the company and some other long-tenured Yahoo! directors decided to leave the board.

However, new CEO Scott Thompson declined Loeb's offer on the grounds that he wasn't qualified.  Here's what Yahoo! said on March 25th -- when they announced 3 of their own directors to serve on the board:

...in view of Third Point's significant ownership position and the qualifications of Harry Wilson, the Board concluded that it was appropriate to propose that Mr. Wilson and a second individual mutually acceptable to both Third Point and the Yahoo! Board of Directors, outside of the other Third Point nominees, join the Board in settlement of Third Point's solicitation. In addition, the Board believed that there is value in avoiding the cost and distraction that inevitably accompanies a proxy fight, and determined that this proposal was in the best interest of all of its shareholders to avoid that expenditure of resources. Third Point founder and Chief Executive Officer Daniel Loeb rejected this proposal and declined to end Third Point's solicitation with respect to its own four candidates unless he personally was appointed to the Board. Based on the Nominating and Corporate Governance Committee's thorough review of a broad range of candidates and their qualifications, including Third Point's nominees, the Board determined that other candidates were more qualified for the position. The Board remains open to hearing Third Point's ideas and to working constructively with Third Point, but believes that appointing Mr. Loeb to the Board is not in the best interest of the Company and its shareholders.

Loeb himself responded to this reasoning the next day:

You told me that the Board felt my experience and knowledge ‘would not be additive to the Board’ and that as Yahoo!’s largest outside shareholder, I would be ‘conflicted’ as a Director, wrote Loeb to CEO Scott Thompson. “Am I conflicted to advocate for the interests of other shareholders because we are owners of 5.8% (over $1 billion) of Yahoo! shares (unlike the non-retiring and proposed board members who have never purchased a single share of Yahoo! except for subsidized shares issued through option exercises and shares “paid” by the Company in lieu of fees)? [emphasis mine] Only in an illogical Alice-in-Wonderland world would a shareholder be deemed to be conflicted from representing the interests of other shareholders because he is, well, a shareholder too. This sentiment further confirms that Yahoo!’s approach to Board representation is “shareholders not welcome.”

Indeed, it is ridiculous to suggest that a successful investor with nearly a 20 year track record and $9 billion under management with so much skin in the game is unqualified to serve on Yahoo!'s board.

In fact, in 2000, I was a co-author on a year-long study funded by McKinsey and Korn/Ferry in which we exhaustively looked at dozens of outside director biographical information and corporate governance features as predictors of a company's future increase in stock performance.

The study was very interesting because we only found ONE governance or board characteristic that predicted a future increase in the stock price: whether or not the outside directors had skin in the game -- also known as a sizable investment in the company which they dug into their own pockets to buy (they weren't given the stake by the company and able to treat it like "found money").

The full study is below:

If Scott Thompson wants to spend a year conducting his own longitudinal study proving that Dan Loeb's stock ownership and background would be harmful to Yahoo!'s stock, please be my guest.

So, it's categorically wrong for Thompson to say Loeb isn't qualified to serve on the Yahoo! board.  It's just the opposite: he's the MOST qualified to serve - over and above every other director, including Thompson himself.

Also, remember that Yahoo!'s stock price is down 53% in the last 5 years while the Nasdaq average is up 23%.  This seems to be a situation where all hands need to be on deck in the boardroom to ensure every possible step is taken to correct things.  Shareholders need to be MORE engaged at the board level after that 5 year track  record -- not LESS.  Thompson and the outgoing members of the board, who were responsible for turning down the $33 a share offer from Microsoft (MSFT), haven't earned the right to pick their own successors and deem that Loeb isn't qualified to serve.

But here's the most ironic thing about Yahoo!'s "let them eat cake" insouciance towards Loeb's request: not four years ago, Yahoo! appointed Carl Icahn to its board along with 2 other folks of his choosing, including tennis buddy Frank Biondi and ex-Nextel CEO John Chapple.

From the July 21, 2008 agreement with Icahn, here is outgoing Yahoo! Chairman Roy Bostock:

We look forward to working productively with Carl and the new members of the Board on continuing to improve the Company's performance and enhancing stockholder value. Yahoo! is a world-class company with an extremely bright future, and collaborating together, I believe we can help the Company achieve its ambitious goals.

And from Jerry Yang:

I look forward to working together with our new colleagues on the Board to make that happen.

At his height of ownership in November 2008, Icahn owned 5.5% of Yahoo!'s shares outstanding.  Loeb currently owns 5.8% of Yahoo!  So, if stock ownership didn't make Icahn more qualified to serve than Loeb, what did?  His technology experience?

As most know, Icahn had virtually no Web investing experience prior to building his Yahoo! position and scant technology investing experience.

Of course, on October 23, 2009 -- 15 months after being asked to join the Yahoo! board by Roy Bostock -- Carl Icahn decided to quit.

So, what gives? If Roy Bostock and his outgoing colleagues determined that Carl Icahn was fit to serve because he was the second largest shareholder at the time and he wanted to serve, how can they say "talk to the hand" when the largest shareholder today wants to serve?

It is completely hypocritical and disingenuous.

There is way too much to do at Yahoo! for Thompson to be playing a game of chicken with Loeb over a proxy fight now.

Oh, and remember that Thompson and the rest of his directors get to use the shareholders' cash in the company to pay for their part of the proxy fight, while Third Point has to pick up the tab for its efforts completely on its own dime.  Yahoo! shareholders are paying to keep the largest shareholder off the board to better represent their interests.  Alice In Wonderland, indeed!

If Scott Thompson doesn't think that ISS and other proxy advisory firms will look very favorably on a large shareholder wanting to elect a short slate of candidates to the Yahoo! board for better governance and the last 5 years of performance, then he deserves to lose.

He should be smarter than that and appoint Dan Loeb to the board immediately, along with the other Third Point nominees.

When Thompson has outperformed the Nasdaq by 50% over 5 years, he's welcome to put on whomever he wants on the board.  Until then, adult supervision is definitely required in the Yahoo! boardroom and Dan Loeb will provide that.

It's time to focus on the much more important task of turning Yahoo! around behind a unified and fully communicated strategy that is clear to all.

[Long YHOO]