At Yahoo, Pressure for Change Tests Board’s Loyalty to Mayer

By December 28, 2015Sutton View

Directors are urged to challenge CEO Marissa Mayer as they meet to decide fate of core business

Three days of deliberations between Yahoo Inc.’s directors this week have put the board in the hot seat and tested its loyalty to Chief Executive Marissa Mayer.

The nine-person board, which in different forms has overseen seven chief executives in the past decade, finds itself in a familiar place this week to determine the fate of a business that has failed to produce growth in another turnaround attempt.

Though Yahoo’s board has supported Ms. Mayer for more than three years, the group has come under pressure to challenge her amid a new threat from activist investor Starboard Value LP and a growing crisis of morale inside the company that has resulted in the departure of dozens of top executives in recent months.

During the regularly scheduled meetings, which began Wednesday and continue through Friday, the board is weighing whether to sell Yahoo’s core business, proceed with a spinoff of its stake in Alibaba Holding Group Ltd., or both, people familiar with the matter said. The discussions had not resulted in any decision as of early Thursday, one of the people said.

A spokeswoman for Yahoo declined to comment.

Ms. Mayer, who is on the board, has helped select most of the other eight members and carefully managed their access to information about the company, people familiar with the matter said.

In recent months, Ms. Mayer has publicly opposed calls to sell the core business. She has insisted on continuing with the Alibaba spinoff despite failing to get approval from the Internal Revenue Service, raising risk the deal could be challenged in a future audit by the agency and potentially put shareholders on the hook for billions of dollars in taxes.

Starboard, which has asked Yahoo’s management for a board seat, has indicated it is prepared to stage a proxy fight if the Alibaba spinoff happens, people familiar with the matter said..

“I’ve lost confidence in the management team,” Mike Winston, who runs New York hedge fund Sutton View Capital LLC, said in an interview. “I think it’s up to the board to spin-off Alibaba or announce a comprehensive break-up plan,” said Mr. Winston, whose fund owns an unspecified block of Yahoo shares.

Ms. Mayer began remaking Yahoo’s board after joining the company in July 2012, seeking to add directors with whom she was previously acquainted. The CEO has helped select five out of the other eight current directors.

Max Levchin, a serial tech entrepreneur who co-founded PayPal Inc., was her first addition, in December 2012. Mr. Levchin worked with Ms. Mayer briefly at Google Inc. after the search giant acquired his startup Slide Inc. in 2010.

A broader shakeup came the following year, when Dan Loeb, the activist investor who previously gained three Yahoo board seats and pushed for Ms. Mayer’s hiring, sold his stake in the company and announced he was leaving the board. He and the two other directors he brought onto the board, Michael Wolf and Harry Wilson, gave up their seats in 2013.

Ms. Mayer replaced them in 2014 with David Filo, the Yahoo co-founder who had been a close adviser to her; Charles R. Schwab, the founder of the namesake brokerage who sits with Ms. Mayer on the board of the San Francisco Museum of Modern Art; H. Lee Scott, the former CEO of Wal-Mart Stores Inc. who Ms. Mayer knew from serving on the retailer’s board of directors; and Jane Shaw, the former chairman of Intel Corp.

Around that time, Ms. Mayer also ended a practice that had been in place which paired each Yahoo director with an executive at the company to mentor and share ideas, according to a person familiar with the arrangement. The CEO barred some members of her executive team from interacting directly with board members without her permission, the person said.

Ms. Mayer has maintained the board’s support even as the confidence of some investors and employees has appeared to wane.

Nearly all Yahoo employees approved of the CEO when she first joined, according to data collected by worker survey site Glassdoor Inc. Her approval rating fell to 80% at the end of 2014 and fell again to 73% in the current period, according to the site. That compares with a 100% approval rating of Google Inc. CEO Sundar Pichai and a 97% approval rating of LinkedIn Corp. CEO Jeff Weiner.

Despite a lack of growth in the core business, the board has continued to approve higher pay packages for Ms. Mayer. Her compensation totaled $42 million in 2014, a 69% increase from previous years. Her high pay has been flagged by U.S. proxy-advisory firm Institutional Shareholder Services, which said earlier this year that “shareholders should continue to closely monitor the company’s pay programs and in particular, the magnitude of CEO pay.”

Yahoo’s chairman is one of the three directors who preceded Ms. Mayer, the technologist and investor Maynard Webb. An early executive of eBay Inc., Mr. Webb has also run LiveOps, a maker of customer service software, and created an early-stage investment fund.

Mr. Webb and the rest of the board are now pressed to take action, said Joseph A. Grundfest, a professor of law and business at Stanford University’s law school.

“They can spin the Alibaba shares, spin or sell the operating company, or stand pat,” Mr. Grundfest said in an email. “That’s a better position than many boards face when a company is in crisis and all alternatives are bad. Here, the board has a choice among workable alternatives.”

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