This week I received my proxy information from Yahoo. The introductory letter accompanying the shareholder material starts out with a bang: “The vote you will cast for directors at Yahoo’s August 1, 2008 annual meeting is the most important for stockholders in our history.” In my head, I imagined a deep male voice reading this statement in a hushed yet dramatic tone, not unlike one of those warnings you hear before an episode of Cops: “The following program contains scenes that may be unsuitable for minors. Parental discretion is advised.”
With that sort of introduction, you immediately know that the Yahoo Board is fighting for its life, and they don’t waste any time identifying the enemy: Carl Icahn’s board removal proposal. The letter suggests that Icahn’s only strategy is to sell to Microsoft and that “given Microsoft’s stated position of not wanting to acquire Yahoo!, the election of Mr. Icahn’s slate could result in substantial erosion of stockholder value.”
Lesson #1: In the Future, Yahoo is Not the Laughing Stock of Silicon Valley
Of course, we all know that Microsoft ‘stated position of not wanting to acquire Yahoo!’ only came into being after the current Yahoo board rejected Microsoft’s offer of $33 a share. And considering the fact that Yahoo is now trading at $22.09 – a drop of over $15 billion in valuation – one could conclude that a warning of a ‘substantial erosion of stockholder value’ from the current board is a bit of pot calling the kettle black.
But OK, that’s stating the obvious. No doubt the brilliant minds at Yahoo who rejected Microsoft did so for good reason. Indeed, they expand upon their rationale as the letter continues. Here’s the highlights:
“We made a deliberate, disciplined decision to make investments that would generate greater long-term value for stockholders.”
“We are well-positioned to capture growth in an online advertising market that is projected to grow from approximately $40 billion in 2007 to approximately $75 billion in 2010.”
“We believe that successfully executing on our strategy of being the “starting point” for the most consumers on the Internet and the “must buy” for advertisers will enable us to generate double-digit growth in operating cash flow . . .”
“We’re continuing to see benefits from last year’s rollout of Panama . . .”
“Our acquisitions . . . have all helped advance our core strategies.”
“We are winning new business partners and expanding relationships with existing partners . . .”
“Soon, we will roll out our new advertising management platform . . .”
As I read through all these reasons to maintain the status-quo at Yahoo, I am reminded of the one-hit wonder from the 80s, Timbuk3. Their one popular song: The Future’s So Bright, I Gotta Wear Shades. On the one hand, I like the ‘glass half full’ optimism espoused by the Yahoo board. But on the other hand (a much bigger and powerful hand), I have to rain on the Yahoo parade here. If all you can talk about is the great future ahead of you – without nary a mention of measurable success today, you are basically admitting failure.
I mean, look at these statements in a little bit more detail. For example, “We are well-positioned to capture growth in an online advertising market that is projected to grow from approximately $40 billion in 2007 to approximately $75 billion in 2010.” In other words, the online advertising market is growing. Great, but what does that have to do with Yahoo’s current strategy? As I have said numerous times, in the online advertising space, growing revenue is not a victory – a rising tide raises all ships. Growing market share, on the other hand, is a sign of success. And as we know, Yahoo has not grown market share in search, email, or display over the last few years.
And what about the ‘benefits’ from the Panama roll-out? Is one of the positive outcomes of the Panama roll-out signing a deal with Google to better monetize your search traffic? One would think that if Panama was really a success, a Google monetization deal – one that Yahoo claims could make up to $400 million in incremental revenue in 12 months – would not be necessary. If you can make almost half a billion dollars in a year by using your competitor’s product, Panama cannot be considered a success.
“We are winning new business partners and expanding relationships with existing partners . . .” And? That’s called running a business – if you weren’t winning new business partners, I would start auctioning off the office furniture.
“Soon, we will roll out our new advertising management platform . . .” Soon I will cure cancer and win the lottery. It’s great to talk about the future, but ‘there’s no tomorrow if you don’t worry about today.’
At the end of the day, I think I can pretty succinctly sum up Yahoo’s argument in two points: 1) OK, we haven’t done anything in the last few years and we are losing market share, but give us a chance, we’ll be doing cool things in the future! 2) Even if you think we suck, Carl Icahn will suck even more, trust us. This is about as weak a two-pronged argument I’ve ever heard. Personally, I plan to attend the August 1 shareholder meeting, and I’ll be bringing the bacteria-free tomatoes.
Lesson #2: Heads We Win, Tails You Lose: A Primer on Executive Compensation
Stockholder proposal #3 – from the United Brotherhood of Carpenters Pension Fund – suggests the following amendment to the Yahoo articles of incorporation:
Resolved: That the shareholders of Yahoo . . . adopt a pay-for-superior performance principle by establishing an executive compensation plan for senior executives that does the following . . . delivers a majority of the Plan’s long-term compensation through performance-vested, not simply time-vested equity awards . . . establishes performance targets . . . relative to the performance of the Company’s peer companies . . . limits payments under the annual and performance-vested long term incentive components . . . when the Company’s performance . . . exceeds peer group media performance.
On its face, it seems like a reasonable request to tie compensation to performance, right? We have all had our annual performance reviews and seen our raises and bonuses rise and fall based on our individual performance and the overall health of the business, so why not apply this principle to the executives at Yahoo – or at any company for that matter?
Well, the Yahoo board has numerous reasons why their executives shouldn’t be treated like us average peons. First, let’s start with Jerry Yang – the man who has successfully continued the downward slide begun by his predecessor, Terry Semel (who, by the way, made over $200 million in one year while he lead Yahoo into the sorry state it is in today). The board has this to say about Jerry Yang:
The proposal fails to take into account the fact that our Chief Executive Officer, Mr. Yang, received a nominal annual salary of only $1 for 2007 . . . did not receive any bonus or other compensation from the Company in 2007, and was not granted any stock options or other long term equity incentive awards . . .
I have two things to say about this argument. First of all, the fact that Yang doesn’t get any payment does not counter the argument that executives should be incentivized to increase company performance. Indeed, getting no payment is probably just as bad as getting a guaranteed huge payment – in both cases, your compensation is not tied to the overall health of the company.
Secondly, Jerry Yang is a billionaire already and to that end, money is not the primary motivation for his work at Yahoo. But beyond Jerry Yang, there are a lot of people at high levels inside Yahoo who are making a ton of money that is clearly not correlated to Yahoo’s declining value and market position. Susan Decker, Yahoo President, received $14.8M in 2007, including a $1.1M bonus. Farzad Nazem’s total compensation went from a mere $12.4M in 2006 to $22.3M in 2007 (though to be fair, he only got a $220K bonus). The lowest paid Yahoo exec was Blake Jorgensen the CFO (ironically), who scraped by with $1.6M in compensation.
Bottom line: arguing that your billionaire CEO doesn’t get paid doesn’t carry any weight against the “pay for performance” argument, especially when he is not incentivized by company success and the other execs are making millions while the company flounders.
Moving on the Yahoo argument #2, the board argues:
This type of benchmarking is inconsistent with the compensation practices followed by the majority of the companies with which Yahoo competes for executive talent. The Board believes that, if the policy as described in the stockholder proposal was adopted, the Company could be placed at a substantial disadvantage in attracting and retaining the most qualified executives.
In other words, corporate executives are in their own self-contained universe and would never accept a job that actually connected their pay to their performance. Sadly, this is no doubt the case for many executives. Then again, do you really want to hire someone to run your company who doesn’t have the confidence in his own abilities to put some skin the game?
And while it may be true that pay for performance is “inconsistent with the compensation practices followed by the majority of the companies with which Yahoo competes”, that doesn’t mean you have to adopt the bad decisions of your competitors. If Southwest Airlines decides to save some money by skipping a few safety checks here and there, does that mean that United should follow suit to compete financially? This sort of circular, weakest-link argument is the kind of group-think that sinks companies.
The Board (sounds like “The Borg”) continues with a financial argument next:
The Board believes requiring performance targets be established relative to peer companies could shift executives’ focus from long-range growth to short-term comparisons and would place Yahoo! at a substantial competitive disadvantage . .. Further the Board believes that Yahoo! should be able to reward its executives for good performance even if its peer companies also do well, particularly since . . . it is difficult to identify a single comparable peer to the Company given the breadth of the Company’s business.
First of all, I don’t care whether you measure against long-term or short-term performance, either way the current executive team is grossly over-compensated. You want to talk about the last eight years of Yahoo’s existence? The rapid loss of search market share, the continuing erosion of email market share, the threat of Google-DoubleClick, the disappointing “Yahoo Entertainment” venture, the growth of Craigslist at the expense ofHotJobs? I’m happy to measure performance by short-term or long-term performance, but clearly “The Board” is doing neither.
As to the argument that “it is difficult to identify a single comparable peer to the Company . . .” Sigh. Do I need to send “The Board” a Google Map with directions from Yahoo in Sunnyvale to Google in Mountain View? Give me a freakin’ break.
And finally, The Board tries to show how equity grants somehow incentivize performance among executives:
In 2007, equity-based awards granted to the Company’s executive officers (other than Mr. Yang who received only his $1 base salary) directly linked approximately 82% to 92% of each executive’s annual direct compensation to the performance of the Company’s stock.
Sounds good on paper, doesn’t it, until you realize that we are talking about the difference between a $15 million annual package versus a $30 million one. In other words, if the Yahoo executives completely drove Yahoo into the ground (which they have basically done), they would still receive millions of dollars. Explain to me how that ties anything to performance.
I recognize, of course, that a lot of this is not specific to Yahoo and that there are plenty of idiotic companies that pay their executives tens of millions of dollars annually regardless of performance. But Yahoo’s problems go far beyond overall American corporate ineptness. We are talking about a company that was once the clear king of the Internet that is now fighting for a spot in the top ten. They’ve anointed the founder as CEO – who has no experience outside of Yahoo, who is filthy rich, and has no financial incentive to improve the company. They talk about the future with no evidence that any current efforts are paying off and lots of evidence to suggest that their core business are under serious attack. And on top of that, they spend millions to ‘retain top executives’ – the very top executives who have let their market share, top employees, and profits disappear.
Carl Icahn may have ‘no plan’ as the Yahoo Board suggests, but at this point I’m willing to accept ‘change for the sake of change.’ Otherwise I fear that in a matter of years I’ll have to add Yahoo to my list of companies like Pan-Am, Sears, and Kmart – companies with seemingly insurmountable leads in their industries that have either already died or will soon disappear.
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