Don’t worry about Elon taking Twitter private and scrapping its board
It’s a full Musk takeover
‘A bad board will kill’
“Good boards don’t create good companies, but a bad board will kill a company every time.”
Venture capitalist Fred Destinwrote that in 2018, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently in light of Musk’s hostile bid. It even seemed to get a nod from Dorsey himselfwhen he replied to a tweetcontaining the quote, “big facts.”
Broadly speaking, aboard’s most important rolesinclude hiring, paying and monitoring the chief executive officer.These tweets and the general conversation that has emerged have important implications for understanding boards and their role in shepherding a company.
Academic research suggests that board members at large companies – whotypically receive generous compensation packages– may be limited in their ability to perform these tasks effectively. In our work, we found thatboards often find it impossibleto conduct adequate monitoring and rein in wayward CEOs because there’s just so much information for modern boards to process with theirlimited time. And the social dynamics involved in the board also make it difficult for directors to speak up and oppose other directors.
In a separate study involving face-to-face interviews with directors,we were consistently toldthat directors take their board service seriously and operate with their companies’ best interests in mind. But they do so with an eye toward collaborating with the CEO and the rest of the executive team rather than serving as impartial observers, as their “independent” status suggests they should.
While our work didn’t focus on this, if the board and the CEO fundamentally disagree about the direction of company – which was often the casebetween Dorsey and the Twitter board– it would certainly be problematic and could lead to less than optimal decisions being made.
In other words, a board that isn’t functioning effectively can definitely destroy a company’s value. Andsome reporting suggeststhat’s what happened to Twitter, whoseshares were trading at less than halftheir 2021 peak before Musk disclosed he hadamassed a 9% ownership stake.
A raider’s lament
That brings us to the next question: Does not owning a significant stake in a company you oversee make it more likely that you’ll run it into the ground, as Musk seemed to suggest?
A few days aftermaking his takeover offeron April 14, the billionaire,responding to a tweetshowing how few shares Twitter board members own, posted that its directors’ “economic interests are simply not aligned with shareholders.”
Musk’s arguments harked back to takeover bids from the 1980s in which activist investors – or “corporate raiders” – would argue that executives’ interestsdid not align with those of shareholders. As “Wall Street’s” Gordon Gekkofamously railed against executivesof a business he wanted to take over, “Today, management has no stake in the company!”
Musk’s words echo Gekko’s “greed is good” speech, except in regard to independent directors, whocomprise the vast majorityof corporate boards. The simple definition of an independent or outside director is that they don’t hold an executive role in running the company, such as chief executive officer or chief financial officer.
In reality, Twitter’s board share ownership is very similar to other companies.
Excluding Dorsey, independent Twitter directorsheld a median ownership stake of 0.003%. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’scompany Tesla is similarly minuscule, at 0.23%.
Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity.
Mixed research
Academic researchers on effective corporate governance in the 1970sargued that outside directorsshould avoid owning many shares in the companies they oversee to maintain objectivity. More recently,management scholars have suggestedthat higher stakes couldprovide a way to motivatedirectors to monitor management and make decisions more in line with shareholder interests.
But other work that examined multiple studies shows the impact of director stock ownershipis mixed at best, with some studies suggesting higher stakes potentially lead to negative outcomes, such asexcessive executive and director compensation.Some researchers have found that boards with larger ownership stakescan improveacompany’s operational performanceandbetter align outside directorswith theinterests of shareholders.
Since the passage of the Sarbanes–Oxley Act of 2002after massive accounting scandalsat Enron, WorldCom and elsewhere, corporate governance issues such as board oversighthave become increasingly important. This led to a number of changes intended to align the interests of managers and those of shareholders, including a focus on board independence and adjusting executive compensation.
Although our research shows boards are limited in their ability to monitor management,they’re still better than nothing.
In his letter to shareholders announcing his bid, Muskvowed to “unlock” Twitter’s potentialas aprivate company, without a public board. We may soon see if he’s right.
Article byMichael Withers, Associate Professor of Business,Texas A&M UniversityandSteven Boivie, Professor of Management,Texas A&M University
This article is republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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