Governance Gone Wrong, Wrong, Wrong
Compliance officers talk all the time about ESG issues these days, but rarely do we have a chance specifically to explore the governance challenges that fall within that broad realm. Now we have three examples of governance gone wrong to consider, all within the space of one week.
First is Tysons Foods, whose namesake CFO John R. Tyson, was arrested over the weekend after he got so drunk that he wandered into the apartment of a woman he didn’t know and fell asleep in her bed.
According to local media reports, Tyson, 32, wandered into the home of a woman in Fayetteville, Ark., around 2 a.m. on Sunday morning. She found Tyson passed out in her bed and called the police, who subsequently arrested Tyson on charges of public intoxication and criminal trespassing; he was released later that day after posting a $400 bail.
What makes this a governance issue is that while Tyson Foods is a publicly traded company with $47 billion in annual sales, it’s also a family-run business. Tyson the CFO is the son of board chairman John H. Tyson, and is among the fourth generation of Tysons to run the company since it was founded in 1935.
Moreover, the single largest shareholder in Tyson Foods is the Tyson Family Trust, which employs a dual-class share structure that gives the family a 10-to-1 voting advantage over other shareholders when trying to push through major decisions. Proxy advisory firms such as Glass Lewis & Co. and Institutional Shareholders don’t like it, but so far the board hasn’t moved to change it.
So as a practical matter, if the Tyson family wants to do something unwise — like, say, put an under-qualified, immature 32-year-old heir into one of the most important jobs in the company — nobody has any real power to veto such a hare-brained idea. So John R. Tyson became CFO one month ago. He is now free on bail, and supposedly will host his first earnings call on Nov. 14.
That was just the start of the week. Then came the tech sector.
Two Bumbling Giants
The next example of governance gone wrong unfolded at Facebook. The company posted an awful earnings report the other week: revenue down 4.4 percent from the year-ago period, and net income down for the third straight quarter. That grim performance prompted Facebook to lay off some 13,000 employees, roughly 13 percent of the company’s total workforce.
This is a governance issue because as Facebook’s revenue and profits lose altitude, the company continues to pour billions into Reality Labs. That’s the R&D skunkworks within Facebook, home to CEO Mark Zuckerberg’s pet project otherwise known as the Metaverse — a project that’s nowhere near ready for prime time and that few people actually want.
Figure 1, below, shows the financial performance of Facebook’s operating segments from its Q3 financial report. In the most recent quarter alone, Reality Labs ran a $3.67 billion operating loss on a measly $285 million in revenue. Operating loss for the nine months to date is $9.44 billion, and we still have a quarter to go.
Why is Facebook doing this? Because, again, the company employs a dual-class share structure that gives too few people too much power. Specifically, Zuckerberg has roughly 55 percent voting control even though he owns only a small fraction of total shares outstanding. So nobody has any real power to tell Zuckerberg no, and Facebook employees end up losing their jobs because of his cluelessness, and bad choices.
Still, things could be worse. Which brings us to Twitter.
By now most of you probably already know that new CEO Elon Musk fired half of Twitter’s 7,500 employees last week, including the CEO, CFO, and general counsel. He then disbanded the board and appointed himself sole director of the company; and quickly engaged in several half-baked ideas like selling “verified” accounts for $8 a month while offering new “official” accounts for government agencies. Oh, wait, Musk scrapped that idea just hours after taking it live.
Then came news on Thursday that Twitter’s CISO, chief compliance officer, and chief privacy officer, and other senior executives involved in privacy and data security all resigned.
Just so we’re all clear, Twitter is currently under a consent decree with the Federal Trade Commission to improve data protection, which came about because Twitter was in violation of an earlier consent decree! And the executives in charge of compliance with that second order just flew the coop.
An FTC spokesman later said that the agency is “tracking the developments at Twitter with deep concern.” Considering how dismissive Musk has been of prior regulatory oversight of his leadership at Tesla, I doubt he’ll care one whit about the FTC unless it starts issuing subpoenas.
What These Examples Mean
All three tales trace back to the fundamental issue of too much power concentrated in too few hands. When power is concentrated like that, bad decisions follow.
So when we talk about the G part of ESG, we really need to be talking about structures that can diffuse power into several different groups. The groups can then work as a system of checks and balances against each other, all grounded in a few basic ethical principles as they jockey to define the organization’s broad objectives and the strategies to achieve them.
Structures such as dual-class shareholder rights, or combined CEO-chairman roles, or weak compliance and audit functions clearly work against that goal. They serve to insulate a few leaders from a rigorous process of finding the truth and the best path forward.
If you want to audit the strength of your company’s governance program, start there: with a look at the structures that funnel power rather than share it. If you want to strengthen your corporate culture, start there: with structures that can encourage people to bring bad news to the boss — and above all, have a boss with the wisdom and humility to know that he or she should welcome that feedback.
None of that was happening at Tyson Foods, Facebook, or Twitter lately; and look at the mess those companies have made.
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