THE BLOG

Ex-Yahoo CEO Isn't the Only Yahoo in the Business

05/18/2012 08:26 EDT | Updated 07/18/2012 05:12 EDT
AP

The resignation of Yahoo CEO, Scott Thompson, last week amid allegations that he fabricated a degree in computer science that was listed on his biography, and in SEC filings has prompted great soul searching in boardrooms across North America.

Resume due diligence seems like such a basic procedure, but one that has been overlooked in this case and in several other high profile cases in recent years. When will they learn?

Despite a candidate's high profile and past accomplishments, due process still includes these types of checks. And it is the board's responsibility -- not the human resources department, not the search firm assisting the board, although they should be doing their homework as well -- no, the CEO is the purview of the board, and the blame clearly lies at their feet.

So what went wrong and is this really such a big deal? Is Thompson any less a CEO without the degree? Does the cost to Yahoo's reputation and ongoing turn-around plan exceed the fallout from an ethical hit like this?

Thompson is the third CEO in three years to walk the plank at Yahoo. His predecessor, Carol Bartz was fired over the phone -- a situation which really questioned the company's board's processes and commitment to management. She may not have been the person for the job, but the board hired her and then fired her in a way that could charitably be described as "unsympathetic and unprofessional".

How could the relationship between the CEO and the board sour to the point where the chair would perform such an act over the phone? Bartz's profane and very public denouncement of her firing only added to the loss of reputation, and embarrassment of Yahoo and its board, not to mention Bartz herself.

The case mirrors a similar situation that RadioShack faced several years ago.

David Edmondson had been with the company for almost 12 years, moving up the ladder and eventually being promoted to the CEO position. It was only then that the board learned that two degrees he had listed on his resume when he joined the company were non-existent. At the time, the question regarding his suitability for the job was raised, despite the resume flub -- he had shown that he obviously had the appropriate skill set -- could the company get past the situation and move forward? In the end they decided no, and Edmondson resigned.

There is clearly a sense of "tone at the top" at play in both cases. I don't think there is much doubt that both Thompson and Edmondson were capable managers and leaders. And in another level of the organization, perhaps their actions could be overlooked. But in the C-suite, these transgressions are akin to high treason. The CEO and other members of the senior management team are held to a higher standard and that should be the case. What message are they sending to the rank and file if they are allowed to push and stretch the boundaries of ethical behaviour?

And sound ethical behaviour obviously extends beyond the resume. Other activities -- relationships with subordinates (think Boeing and more recently, Best Buy), trading activity (think Berkshire Hathaway) -- the expectations of top management have never been more scrutinized and politicized. They are expected to set an example, and face a certain and speedy exit if they do not recognize this.

The tone at the top is paramount, and one only needs to examine the shenanigans which took place at Enron to understand how a culture can become infected by the scurrilous actions of those running the organization. The fall may not be as precipitous as in Enron, but it is a fall none the less.

In examining this story and others, it is apparent that there are other changes that boards now have to recognize. The passive shareholder is quickly becoming a dinosaur, and a new breed of investor is taking much more of an activist role. They are demanding that the clubby atmosphere associated with many boards be replaced by professional directors who take their responsibilities much more seriously. The position of director is becoming a job category in itself, not just a sideline. And where that is not understood sufficiently, the activist investors and proxy advisor firms are demonstrating their new found clout.

Consider Yahoo once again. The story may not have seen the light of day had it not been for the dogged efforts of a prominent shareholder and activist - in this case Third Point LLC, which holds a 5.8 per cent interest in Yahoo.

Having been rebuffed earlier in their attempts to ramp up performance at the company, Thompson's resume challenges provided an opportune moment to push their agenda back into the spotlight. By suggesting that the board was derelict in its duties, it brought clear evidence of failure to justify their demands. The board had little choice but to accede to their demands, and Thompson's fate was sealed.

We have witnessed the same scenario at CP Rail. An activist investor, Pershing Square Capital Management, keen on unleashing a much more rigid and presumably profitable strategy at the company has demanded change at the top, and a massive restructuring of the board.

The CP board refused to accept their demands, but just two hours before the AGM, the CEO and six incumbent board members, including the chair, resigned to avoid the bloodshed and embarrassment that was clearly going to take place at the AGM. Three proxy advisory firms had backed the dissident board, and momentum had clearly swung in Pershing Square's favour.

The message is clear. Boards are under pressure not only to perform better, but to be seen as performing better. The optics are as important as their actions -- transparency is key. Boards that fail to recognize this do so at their own peril. Change is afoot in the boardrooms, and for shareholders, this can only be a good thing.