Lessons From 23andMe

In what some may consider an admirable show of fiduciary duty, all seven independent directors of DNA-testing company 23andMe resigned this week due to significant disagreements over the CEO’s plan to take the company private. Corporate directors and management teams often have disagreements, but this dispute has resulted in a corporate board revolt. When a significant number of directors decide to resign simultaneously, examining the reasons for the discord might help other corporate boards avoid a similar fate.

According to news reports, at one time, 23andMe was valued at $3.5 billion. The company’s stock price has fallen more than 96 percent over the last five years, and it now has a market cap under $200 million. As its struggles continued, taking the company private became an option the CEO and board agreed to consider. Unfortunately, CEO Anne Wojcicki’s proposed buyout plan was viewed by the board’s independent directors as unsatisfactory.

In a letter responding to Wojcicki’s proposal, the directors wrote:

“We are disappointed with the proposal for multiple reasons, including because it provides no premium to the closing price per share on Wednesday, July 31st, it lacks committed financing and it is conditional in nature. Accordingly, we view your proposal as insufficient and not in the best interest of the non-affiliated shareholders… Importantly, we request that you immediately withdraw your stated intent to oppose any alternative transaction so that we can fully assess whether there is interest from third parties in a transaction that would maximize value for all shareholders.”

So, what led to the independent directors writing a letter to the CEO and ultimately resigning?

First, it’s important to acknowledge that both the CEO and independent board members are responsible for the poor performance of 23andMe stock over a significant amount of time. It would be great if they were now working together to salvage a positive outcome for the company shareholders, but that opportunity ended with the resignations of the independent directors.

Here are some possible contributing factors to the dispute between the directors and CEO that other boards can avoid:

Urgency to improve company performance. Whatever strategies the CEO and board agreed to implement over the last five years have not worked very well, yet the two sides have watched the stock price drop without making significant changes to stop the decline. This suggests a lack of urgency to correct the problems causing the poor performance; a lack of cooperation to address key issues as the stock price continued to decline; or, agreement on a series of strategies that simply failed. No matter what the reason, the board appears to have waited too long to exert significant oversight. The board created a special committee this year to explore possible solutions, but by then the company had become a penny stock. Boards and CEOs must show greater urgency to preserve value for shareholders than seems to have been exhibited here.

Monitoring of communication and the relationship between the CEO and board. How does a company’s stock price continuously decline, but the board and CEO don’t have substantive conversations about solutions? If the board and CEO are not always communicating effectively, they are not going to solve much. Evidence there were cracks in the relationship and communication between the 23andMe CEO and board was confirmed when the board decided to write a letter regarding the handling of the company’s situation. Most times when boards write letters to the CEO, it is not good—generally it means they’ve had talks and reached an impasse. That’s exactly what happened here. Board oversight includes recognizing when communication between the board and management is not effective, and immediately fixing it. Boards must insist on clear and effective communication between the board and management team if they hope to maximize their efforts to improve shareholder value.

Understand the voting structure of the board.  According to the letter the independent directors sent CEO Wojcicki, her proposal stated that she would “oppose any alternative transaction” to taking the company private under the terms she proposed. Once the directors realized that the CEO and her affiliates had voting power to overrule the independent directors’ efforts to “fully assess whether there is interest from third parties,” they resigned. Sometimes directors may have to reconsider how effective they can be at oversight when the voting structure of an organization is slanted toward the CEO. In such a case, directors might want to monitor the situation carefully and consider choosing to resign before the organization declines and they are unable to do anything about it.