Selecting a new CEO or new Board Director is one of the most significant roles of the board of directors. It was with great pride on January 4, 2012 that the Yahoo! Board of Directors announced the appointment of Scott Thompson as the new Chief Executive Officer, effective January 9.
Thompson presented an impressive work history, serving most recently as President of PayPal, a division of eBay. The press release noted his track record was strong for “growing businesses by driving customer engagement built on strong technology platforms.” Under his leadership, investors were informed, PayPal’s user base increased from 50 million to more than 104 million active users, growing revenues from $1.8 billion to $4+ billion in 2011. Yahoo!’s chairman of the board, Roy Boystock, is quoted:
“Scott brings to Yahoo! a proven record of building on a solid foundation of existing assets and resources to reignite innovation and drive growth, precisely the formula we need at Yahoo! His deep understanding of online businesses combined with his team building and operational capabilities will restore the energy, focus, and momentum necessary to grow the core business and deliver increased value for our shareholders. The search committee and the entire Board concluded that he is the right leader to return the core business to a path of robust growth and industry-leading innovation.”
Is there much more an investor can ask for in a new CEO? Yes, according to hedge fund Third Point LLC, owners of 5.8 percent of Yahoo! shares. In a letter to the Yahoo! Board of Directors (May 3, 2012), Daniel S. Loeb, Third Point’s CEO, claims that Yahoo! may have filed an erroneous Form 10-K/A with the Securities and Exchange Commission on April 27, 2012 by asserting that Thompson holds a Bachelor’s degree in accounting and computer science from Stonehill College. According to Loeb, he checked with Stonehill College and confirmed that the school did not award its first computer science degrees until 1983, four years after Thompson graduated. Loeb tells us that by the time Thompson graduated, Stonehill only offered one course in this computer science — “Intro to Computer Science.”
Loeb doesn’t seem to care whether Thompson has the “proven record” presented in Yahoo!’s new release. It doesn’t matter if Thompson has the ability to tackle the strategic review process. Based on his letter, the number one qualification for the CEO job is “trustworthiness” and compliance with Yahoo!’s own governance rules. He values honesty, credibility, and character more than accomplishment. In his own words:
“If Mr. Thompson embellished his academic credentials we think that it 1) undermines his credibility as a technology expert and 2) reflects poorly on the character of the CEO who has been tasked with leading Yahoo! at this critical juncture. Now more than ever Yahoo! investors need a trustworthy CEO.”
If that isn’t enough for Yahoo! to grapple with, Loeb also implies that Patti Hart, Chief Executive Officer of International Game Technology, and the Yahoo! board director who served as chairperson the CEO Search Committee also shares a bad case of embellishment-itis. Seems she represents that she holds a Bachelor’s degree in marketing and economics from Illinois State University when Loeb’s research says her degree was in Business Administration.
The Yahoo! Code of Ethics requires “”Disclosure in reports and documents filed with or submitted to the U.S. Securities and Exchange Commission and in other public communications made by Yahoo! must be full, fair, accurate, timely and understandable… Make sure information we disclose about our company is clear, truthful and accurate.” On this basis, Loeb calls upon the Board to undertake an immediate independent investigation to determine whether misrepresentations have been made to the Board, investors and the SEC, or whether there has been any other violation of Yahoo!’s Code of Ethics.
We’re not used to reading about trustworthiness as a job requirement in CEOs and directors. Not so long ago, after Hewlett-Packard Co. ousted its CEO Mark Hurd for allegedly falsifying documents, such as his expense reports, to conceal a relationship with a former contractor, the news of Hurd’s departure caused HP’s stock to head south. Not only were investors upset about losing this CEO, Hurd was defended by no less than Oracle’s CEO Larry Ellison who said in an e-mail to The New York Times that HP’s firing of Hurd was the “worst corporate decision since Apple fired Steve Jobs.” Ellison and Oracle’s Board was so impressed with Hurd’s leadership abilities that they quickly hired him as president and board member. Upon the announcement, Oracle shares jumped. Didn’t look like trustworthiness was on investor radar.
There are numerous instances of allegations against executives for making false claims on their resumes. (“Infamous Resume Lies”). False claims covers a wide spectrum ranging from lying about getting a degree, inflating titles, playing with dates, and, as we see, “embellishment” that transforms your bachelor’s degree major into something a bit more exciting and marketable.
Human resources professionals will tell you resume lying is rampant, and even more common in a challenging economy. In addition to helping corporations attract and maintain talent, HR departments know that one of their primary responsibilities is to weed out untrustworthy applicants as indicated by resume prevarication.
Ironically, even though HR has the most experience at screening candidates, the HR system can break down or be eliminated when searching for new CEOs or directors. Sometimes they are excluded for what is seen as wise at the time, such as privacy concerns or not wanting the HR person to select his or her next boss.
Enter the recruitment firms who report directly to the Board’s search committee. Boards entrust the recruitment firms to do a thorough background check and, for the most part, they do. Indeed, most highly valued recruiters know their CEO candidates personally and may have followed them throughout their careers. Levels of trust are developed between candidates and recruiters. Yet, this trust may have developed later down the road in the candidate’s successful career, and the recruiter may not have ever gone back to confirm the most basic claims, such as, degrees school. They may also not have done a routine or recent background check for other savory behavioral issues, such as brushes with the law. In promoting a candidate, a recruiter may not present the search committee with the full picture. Certain negative information available online that describes a past failure long forgotten in the market may stay that way. Fortunately, recruiters are getting smarter about all this and, indeed, some firms have now started to require candidates to sign releases to access various records, particularly educational and legal.
Knowing that resume padding, embellishment and outright lies are commonplace, even at the c-suite, Boards need to be vigilant and may be able to limit their exposure to controversy and liabilities by utilizing several simple steps:
- work with professional recruitment firms (the “good old boys’ club may be even riskier)
- include the HR officer in your search process with the recruitment firm
- ensure that recruitment firms are contractually responsible for providing a very full and in-depth background report with regard to all candidate representations, as well as legal and financial status (a good time to ensure that your corporation’s general counsel is involved in the process)
- require the recruitment firm to conduct a full Internet search for the candidate for news articles, blogs, Facebook, etc. (recognizing that not everything on the web is accurate).
Some recruitment firms will charge an additional fee for a more complete background check. Special service packages have been developed for this (which only confirms how limited the background searches at this level have been in the past). Hold their feet to the fire. And, don’t forget, the Internet is accessible to all of us. Do your own basic search to see how the candidate presents on the web.
Loeb isn’t claiming Thompson lacks a Bachelor’s degree in accounting – he just asserts that Thompson took credit for an extra discipline – added an embellishment to his resume. No one expects the CEO of Yahoo! to write code. His lack of a computer science degree from the early 80′s would appear irrelevant to the knowledge base he needs to lead the company. Similarly, the trust placed in Director Hart is there because she is the CEO of a tech business, not because she claimed to have had a Bachelor’s degree in marketing and economics, when it was only in Business Administration. Thompson and Hart are there because the Board valued their accomplishments.
Loeb’s most significant claim is that if his investigation is correct, neither Thompson nor Hart have the character necessary for sound leadership. He points to the fact that Yahoo!’s own governance code requires clarity, accuracy and truthfulness in reporting to investors and the government, and he believes this is lacking, pointing the documents filed with the SEC. Will Yahoo!’s board care? Will the investors care? Will the SEC? And, if they do not, what impact will this have on corporate governance expectations and enforcement? Does the tone at the top matter?