The perils of having a passionate helmsman

By John Gapper

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Switching jobs from Chief Yahoo to Yahoo Chief does not sound like a stretch. It was for Jerry Yang.

This week, he signalled an end to his short and rocky tenure as chief executive of the company he founded. When a successor is found, he goes back to being its corporate conscience, board director, 4 per cent shareholder and resident nice guy.

Mr Yang wrote to Yahoo employees on Monday that: “All of you know that I have always, and will always bleed purple [Yahoo’s corporate colour]. I will always do what I think is right for this great company”.

That was the problem.

In terms of Yahoo’s share price, Mr Yang’s period at the helm was a failure. It stood at $28 when he took over from Terry Semel in June 2007 and fell to just over $10 on Monday, when the announcement came. Along the way, he spurned a $31-a-share takeover offer from Microsoft.

What he thought was right for Yahoo turned out not to be, and his passion for the enterprise he built, which he thought could flourish independently, was misguided. Sometimes, what a company requires is not a passionate leader but a dispassionate one.

We could delve into the things that Mr Yang did wrong – antagonising Steve Ballmer, Microsoft’s chief executive, by playing pointlessly hard to get, failing to give Yahoo a clear direction, confusing executives etc – but it would miss the point.

The point is that he ought not to have been given the job in the first place. He is widely regarded as bright, decent and committed. He had the energy and vision to turn Yahoo into one of the internet’s first great successes. He just happened not to be a good chief executive of a company that outgrew him.

Mr Yang suffered from similar shortcomings to what used to be called the entrenched CEO. Despite his own stake in the company, his interests – and what he thought was right – did not mesh with those of other shareholders.

This was not for the usual reason. When T. Boone Pickens was launching raids on Texas oil companies in the 1980s, he once declared that “chief executives, who themselves own few shares of their companies, have no more feeling for the average stockholder than they do for baboons in Africa”.

At that time, when corporate raiders and leveraged buy-out firms started to shake up complacent managements at US companies, entrenchment was rife. Many CEOs were happy if their companies generated enough cash to get by, letting them lead a comfortable life at the country club.

That problem has faded, driven out by rich, equity-based compensation for chief executives and more active shareholders. Carl Icahn, like Mr Pickens a veteran of shareholder revolts in the 1980s, sits on the Yahoo board after his failed effort to force the company into a deal with Microsoft.

Indeed, at least until recently, many executives yearned to become a gun for hire to a private equity firm, spending three or four years turning round companies in return for a jackpot. In a generation, chief executives have turned from indolence to hyperactivity.

Nor did Mr Yang fit the profile of the entrenched CEO. He owned plenty of equity, was young and enthusiastic, and tried to do right by employees and investors. His shortcomings stemmed less from financial entrenchment than sentimental attachment to Yahoo.

After his talks with Mr Ballmer failed, Mr Yang insisted that he had been open to selling Yahoo at the right price, but was never plausible. His first instinct as chief executive was to revive the company that he co-founded with David Filo at Stanford University in 1994.

There would have been nothing wrong with that if he had had a clear idea about how to do so. The problem was that, indulged by the pre-Icahn board and Roy Bostock, Yahoo’s chairman, Mr Yang cast fruitlessly around for 18 months until Yahoo ran into an advertising downturn.

Most founders instinctively believe that they should be in charge. Noam Wasserman, a Harvard professor who studied founder-CEOs of internet companies, quotes one as saying: “I’m the one with the vision and the desire to build a great company – I have to be the one to run it.”

But entrepreneurs suffer from two flaws as chief executives of start-ups that turn into big companies.

The first is that they often lack the skills, and sometimes the patience, to manage large, complex enterprises. This is why most technology founders cede control to experienced executives, usually under pressure from their venture capital investors, when the business matures.

If that does not work, they are often tempted to return, as did both Mr Yang at Yahoo and Michael Dell at his eponymous company. Mr Dell, who admittedly had more managerial experience than Mr Yang, took back the reins from Kevin Rollins last year, so far to mixed effect.

The second flaw is their reluctance to let their companies be bought out. Mr Yang should have taken Microsoft’s money and let Mr Ballmer deal with the problem but he did not want to give away his baby.

In this respect, entrenchment and attachment amount to the same thing. The true chief executive is committed to building his or her company but is also open to the idea that it and its shareholders may do better in the long term by accepting a merger with, or takeover by, another.

Mr Yang was not lazy, or selfish, or indifferent to investors. But he was so fond of the company he created that, although he faithfully attempted to do the right thing, he failed. Yahoo needs a red-blooded chief executive.

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