The Trouble with Dot-Com Boards
October 1 2000 by Peter Buxbaum
Once an icon of Internet commerce, Amazon.com has emerged, of late, as the whipping boy of the dot-com world. Last June, Wall Street analysts, once tolerant of its failure to turn a profit, suddenly reversed engines and began lambasting the e-tailer for its dearth of earnings, high debt, and poor capital management.
From then on, Amazon couldn’t do anything right. Its strategy of investing in other Internet merchandisers once looked like a great idea, but doubts emerged when one affiliate, Living.com, filed for bankruptcy. Even its joint venture with Toys ‘R’ Us drew criticism from those who saw the deal as evidence of Amazon’s lack of retailing acumen.
Is there something structurally amiss at Amazon?
The answer, according to experts in corporate governance, is a resounding “Yes!” The composition and functioning of an Internet company’s board of directors, they say, can make a difference between success and failure.
“Dot-coms, almost without exception, are putting financially oriented executives with strong personal interest in the company-investment bankers, venture capitalists, angels or large shareholders-on their boards,” says Robert Lear, who writes on governance issues regularly for CE and is the former CEO of F.&M. Schaefer. “None of these individuals usually has the practical operating experience necessary to guide the generally young and inexperienced dot-corn CEO in how to manage the intricacies of running a company. All they want to do is watch the stock price.”
While dot-coms think of themselves as a breed apart, corporate governance is one area where emulation rather than rejection of older models is preferable. “The benefits of good governance are the board’s ability to be objective, to provide oversight, and to give input to the CEO,” says Julianne Reynolds, a Boston-based managing director of Russell Reynolds Associates, an executive search firm. Boards that consist of “friends of the family” simply do not make the grade. Yet, Internet companies tend to have high levels of insiders on their boards.
It’s a tendency that has not gone unnoticed among the investment community. “We like to see a majority of independent directors,” asserts Jamie Heard, CEO of Proxy Monitor, an advisory service to institutional investors. “Insiders tend to be cheerleaders for the stock price and that makes for a lack of accountability and oversight.”
Venture capitalists don’t qualify as independent directors by Heard’s definition, and their presence is viewed as potentially detrimental. “Some VCs insist on putting staffers on the board to do nothing but look at the figures and without bringing anything else to the party,” says Roger Kenny, managing partner of Boardroom Consultants and co-author of E-Board Strategies: How to Survive and Win.
By these standards, Amazon’s governance has been a ticking timebomb.
Amazon’s board of directors consists of founder and CEO Jeffrey Bezos; representatives of two venture funds; and two other directors: Scott Cook, chairman of Intuit and Patricia Stonesifer, co-chair of the Bill and Melinda Gates Foundation. Intuit is a strategic partner of Amazon.com, leaving Stonesifer the only independent voice on the board.
“Amazon is a good example because Bezos doesn’t have a mentor,” says Kenny. “He could have benefited from the advice of experienced distribution and retailing executives.”
Bezos’ role as chairman, CEO, and director of Amazon.com also raises a red flag. Once established, a typical dot-corn company’s rapid growth rate demands a turnover of executive and directorial authority to people better equipped than the visionary founder to help the company grow.
For example, founders David Filo and Jerry Yang, who invented Yahoo!’s Internet navigation system, are now referred to as Chief Yahoo!s and only Yang sits on the board. The remaining directors include Yahoo!’s present CEO and COO, one venture capitalist, and two independent directors, themselves both CEOs of media companies.
“Yahoo!’s governance has proven to be adept at building and integrating partnerships and alliances,” says Andersen Consulting’s Joanna Horsfall, who is impressed with the speed at which the company has been able to transform itself with new alliances. “Yahoo! does two or three deals a week, ranging from simple alliances to outright acquisitions. Completing each deal takes only five to 10 hours.”
Priceline.com, the name-your-own-price company for everything from airline tickets to groceries, is getting raves of late for its climbing revenues, lean costs, and expectation of imminent profitability.
Meanwhile, the Priceline board looks like a poster child for the values that the governance experts espouse. Founder Jay Walker stepped down from the CEO position when Richard Braddock-a veteran of Citicorp and the former COO of Citibank, who has also held other CEO and senior executive positions was brought on in August 1998. Also on the board is Daniel Schulman, Priceline.com’s president and COO since July 1999. Before joining Priceline, Schulman was president of AT&T’s Consumer Markets Division and a member of that company’s senior executive body.
Rounding out the board are seven outside directors, all boasting high-level experience in technology, media, finance, and travel. The Priceline board’s audit and compensation committees are populated solely by independent directors, a practice applauded by corporate governance watchdogs.
Conversely, the once highly touted Drkoop.com has had repeated brushes with death in the 14 months since it went public, only to be revived by last-minute capital infusions. Caught up in the exuberance of a soaring share price, Drkoop paid tens of millions to Go Network and American Online for the privilege of providing them with health content and later paid millions more to beg out of those deals. Along the way, the stock lost 98 percent of its peak value.
As of mid-August, Drkoop’s board consisted solely of the company’s three co-founders, including Dr. C. Everett Koop himself and a TV medical correspondent. Four other directors had bailed out earlier in the year, one resigning after the business relationship between Drkoop and his own company went sour.
Late in August, Drkoop closed on $20 million in equity financing, which would reportedly keep it alive for another four months. The new investors promptly replaced the executive team and demanded the right to appoint four new directors. Unfortunately, the new executives all came from VC Prime Ventures, which raises the question of whether Drkoop’s face-lift is really intended to revamp the company’s governance, or has some other purpose.
Roger Kenny notes that a company’s governance practices may vary depending on its goals. “The founder needs to decide whether the aim is to become a successful independent firm or whether it’s positioning itself as takeover bait,” he says. “If the company is to be successful in its own right, the creator has no choice but to move on. Board members with different skills may also become necessary.”
As for Amazon.com, Jeff Bezos clearly still aims to build his company into an Internet retailing monolith. But unless Amazon changes its course-a matter to be taken up at the governance level-the company may well be headed for a very different fate.