Yahoo Insiders Should Be Shown the Door Out

September 10th, 2009
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Contributed by: Eric Jackson, Ironfire Capital
Does a leopard change its spots? Not at Yahoo! (YHOO); every director and officer there seems to have a congenital affliction that is forcing them to withdraw as much compensation as they can from the shareholders like a personal ATM.

The company's always had a laissez-faire approach to compensation. A techie friend from the Valley explained it to me this way: "Hey, it's tech. It's how we've always done it. We have a war for talent out here. Where would we be as a company if we didn't pay so much?"

If we were talking about a vertical stock price, then I'd buy that. But for Yahoo!'s shareholders, money is draining out of Yahoo! at a faster pace in the face of dismal performance in the past four years than compared to when the company's stock was going up. And the directors who are supposedly minding the store on behalf of the shareholders have gotten in on the money grab themselves.

It doesn't matter that the stock is trading at 63% less than the $40 a share Yahoo!'s board proudly proclaimed it was worth when Microsoft (MSFT) wanted to buy the company last year.

These insiders aren't too proud to cash out their "found money" stock holdings for whatever they can get in the open market. If I was still a Yahoo! shareholder, I would be alarmed. As a casual observer, I'm simply galled at this pigs-at-the-trough behavior.

A review I did of the Yahoo! insider transactions from SEC filings for the past two years (see below) reveals the following (and keep in mind that Yahoo!'s stock price has dropped 38% over this period vs. -21% for the Nasdaq):

- Insiders have bought $67 million in Yahoo! stock in the past two years. However, of this amount, the vast majority was bought by Carl Icahn for his hedge fund, which he has already sold (and more -- $189 million) in the last two weeks. A small amount of stock was purchased by Michael Murray, Yahoo!'s chief accounting officer, who announced last week that he's leaving the company. Not including Icahn's and Murray's stock purchases, Yahoo! insiders have collectively bought only $103,700 in stock in the past two years.

- Over the same period, Yahoo! insiders have cashed out $233 million in stock.

- In those two years, Yahoo! insiders have also seen zero strike price options vest which they have yet to sell in the open market but which have a current market value of another $58 million.

- Therefore, for every dollar of stock purchased by a Yahoo! insider in the last year, he sold stock or received options worth $2,159.

Some of Yahoo!'s top executives are cashing out at a fever pitch. Michael Murray, Yahoo!'s chief accountant, began selling over $500,000 in stock last August. Last week, he announced he would be leaving the company. Hilary Schneider, Yahoo!'s EVP of North America, has sold $1.1 million in stock in the last five months.

The top executive stock seller is Yahoo!'s general counsel, Michael Callahan. Starting on Feb. 1, 2008 -- the very day after Microsoft went public with its $31 offer to buy Yahoo! -- Callahan has been ringing the register on his stock holdings. In eight instances, or a pace of once every other month, Callahan has sold over $2 million in Yahoo! stock. He's also had options vest which he can sell at any time which have a current market value of another $1.7 million. Neither Schneider nor Callahan have bought any Yahoo! stock on the open market in the past two years.

When Terry Semel ran Yahoo!, high levels of compensation reigned. Semel himself cleared well over a half a billion dollars in total compensation for his five years of work at Yahoo! Carol Bartz has positioned herself as the anti-Terry: an operations-focused techie who isn't afraid to get in direct reports' faces. Yet, she shares Terry's fondness for getting paid.

At the beginning of 2009 on the first day Bartz walked in the door as CEO of Yahoo!, the board had loaded her up with stock options with a current market value of over $16 million which she could sell at any time. Within five months of her hiring, Bartz had already cashed out stock worth $2 million. I'm all for her getting the stock up (and according to her employment agreement , her compensation for getting the stock to $18 could be $40 million), but cashing out $2 million after five months of work seems too much too soon.

Wasn't Carl Icahn supposed to be a white knight to save the shareholders from Yahoo!'s "insulting" and "deceitful" board? After his beginning-with-a-bang-but-ending-with-a-whimper proxy contest, Icahn and two of his nominees, Frank Biondi and John Chapple, joined Yahoo!'s board last summer. The first order of business for Yahoo!'s board was loading up the newcomers with free money written from the shareholders' checkbook.

According to Yahoo!'s 2009 proxy statement, the three shareholder activists each immediately received an option to purchase common stock with a grant date fair value of about $250,000 and restricted stock units with a grant date fair value of about $200,000. Call it a half-a-million-dollar signing bonus. It's been a very effective strategy which Yahoo!'s board followed for silencing their biggest critics: co-opt them on to the board and make them fat and happy by paying them off with big compensation.

No doubt, if asked, all these Yahoo! officers and directors would explain the $233 million in stock sales over the past two years - as Icahn recently did - as "portfolio rebalancing." I'm sure their confidence in the company is as strong as ever.

So what should be done about this problem of excessive compensation for poor performance? Most people don't have Jerry Yang's net worth and willingness to work for $1 a year. The problem with the current system of compensation at most public companies is that executives expect guaranteed bonuses, stock grants, and zero price stock options. There is no variable component to their compensation. It's always guaranteed and it's always going up.

Sue Decker, Yahoo!'s former president who left the company when she was passed over for the top job for Bartz, was paid total compensation of $16.0 million, $14.8 million, and $15.4 million in 2006, 2007, and 2008 respectively. Over those three years, Yahoo!'s stock dropped 70% from $40.19 to $12.20. That's not pay for performance.

Some corporate governance advocates think a solution is letting shareholders have an annual "say on pay" where they vote in a non-binding way on whether they approve of the company's executive compensation. I'm not sure that will change anything.

If Yahoo! had a "say-on-pay" vote next year and shareholders disapproved of the current pay system, I don't think the current compensation committee members (Ron Burkle, Roy Bostock, and Art Kern) would give a hoot. Real change isn't going to come until these directors are tossed out of their cushy gig, which is why the new SEC proposal for "proxy access", whereby shareholders can nominate directors to run against incumbent directors, is so important.

From where I sit, the only way to change this ever-spiraling upwards trajectory of executive compensation is ensuring that a significant amount of total officer and director compensation is put at risk and only paid out over time.

These insiders should receive minimal base pay but generous equity and/or option grants that are triggered at pre-defined performance levels with claw-backs should the stock fall back later. It's a model that works in the private equity world and it can work for public companies. The claw-backs would prevent excessive short-term focused risk-taking that could harm the company in the long run.

Rather than institute something like this through the Securities and Exchange Commission or the pay czar, I'd rather see the market push this type of solution. It should be the large institutional investors, mutual funds, pension plans, and organizations such as the Council of Institutional Investors - all with skin in the game - to push such a solution forward.

Until that happens, Yahoo! - and many companies like it - will keep being Yahoo!: doling out the cash to those insiders lucky enough to be in their little club.

Yahoo! (YHOO) Executive & Director Insider Stock Purchases and Stock Sales in the Last 2 Years
For Detailed Investor Profiles on these Investors, click below:
Ironfire Capital
Related People: Eric Jackson; Jackson Leadership Systems, Inc
Related Entities: Ironfire Capital US Fund LP
Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News


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