(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
As reported by Bloomberg this week, Scott Thompson, the CEO of Yahoo since January, was forced to resign after it was discovered that he did not in fact obtain one of the college degrees listed in Yahoo’s reports. To make matters worse, a discrepancy was also discovered in the reported educational background of Patti Hart, the Chair of Yahoo’s Governance Committee and the search committee that evaluated Thompson. She will not seek re-election at the Yahoo annual meeting this summer.
Not only has this episode caused huge embarrassment to Yahoo, but it may have tipped the balance in the Yahoo Board’s proxy fight with dissident shareholder Third Point LLC, the group that blew the whistle on the academic discrepancies involving Thompson and Hart. On Sunday, Yahoo’s Board announced that it was giving Third Point three Board seats as part of a settlement.
It sounds like it didn’t take much detective work for the hedge fund to uncover the Thompson discrepancy. Yahoo’s Form 10-K amendment, proxy statement and web site had disclosed that Thompson had a degree in accounting and computer science, when in fact he only had a degree in accounting. As Third Point described in a press release:
A rudimentary Google search reveals a Stonehill College alumni announcement stating that Mr. Thompson’s degree is in accounting only. That announcement is consistent with other documents (including filings with the SEC) that reflect Mr. Thompson received a degree in accounting, but not computer science. . . . [W]e were . . . informed by Stonehill College that Mr. Thompson did indeed graduate with a degree in accounting only. Furthermore, Stonehill College informed us that it did not begin awarding computer science degrees until 1983 — four years after Mr. Thompson graduated. We inquired whether Mr. Thompson had taken a large number of computer science courses, perhaps allowing him to justify to himself that he had “earned” such a degree. Instead, we learned that during Mr. Thompson’s tenure at Stonehill only one such course was even offered – Intro to Computer Science. Presumably, Mr. Thompson took that course.
Painful. [Of course, it may just as painful that Yahoo’s largest shareholder thought first to run a Google search. Why not a Yahoo search?]
Does this episode mean that all public companies have to check up on the resumes of all of their directors and officers? Unfortunately, it may not be a bad idea – an expert in this 2006 Forbes article reported discrepancies in around 40% of resumes, and there are many reports of similar numbers. Maureen Mackey of the Fiscal Times just published this list of high profile cases of resume fraud. Here are a few tips for companies:
- At the very least, the Yahoo experience teaches that public companies should revisit their procedures for gathering and compiling information in director and officer questionnaires for the proxy statement and Form 10-K. If any questions arise, it’s very important to be able to demonstrate that the information was tracked carefully and consistently. See the letter from Third Point to the Yahoo Board last week, requesting detailed information on everything the company looked at in connection with hiring Thompson and drafting the disclosures.
- Further, it’s a good idea to cross-check the proposed disclosures with disclosures about the same individual in the filings of different companies. In the quote above, Third Point stated that other companies’ SEC filings had reported only that Thompson had a degree in accounting, not computer science.
- In hiring new executive officers, it’s a good idea to do a background check, and the cost can be modest compared to the risk. The background check should include verifying academic and professional credentials – including whether licenses are current (CPA, etc.).
- In the event of a proxy fight or threat by a dissident shareholder, it’s important to be even more vigilant in determining that the disclosed information is accurate.
It’s unfortunate that we can’t all trust what we hear – but a little healthy skepticism could have saved the Yahoo folks a lot of anguish.