How the Yahoo board should have responded to their blunder

It was an immaterial, an “inadvertent” error.

That’s what the statement released by Yahoo’s board said, in response to shareholder activists discovering the educational qualifications of its new CEO Scott Thompson were not exactly what everyone thought they were.

Thompson, who joined Yahoo in January, does not have a major in computer science, as his profiles at both Yahoo and PayPal said, but rather one in accounting.

Hedge fund Third Point, owners of 5.8% of Yahoo, made the discovery during a big push (so far unsuccessful) to install four new members to the Yahoo board. They splashed their findings all over the internet in an open letter to the board last Thursday, revealing Thompson’s CV blunder (and that of another board member).

“If Mr. Thompson embellished his academic credentials we think that it 1) undermines his credibility as a technology expert and 2) reflects poorly on the character of the CEO who has been tasked with leading Yahoo at this critical juncture. Now more than ever Yahoo investors need a trustworthy CEO,” Third Point said in the letter.

“Shareholders must also question how the board of directors, specifically the search committee chaired by Ms. Patti Hart, could permit the company to hire a CEO with this discrepancy in the public record.”

The next day, the board mildly acknowledged the error.

“There was an inadvertent error that stated Mr. Thompson also holds a degree in computer science,” the company said.

“This, in no way, alters that fact that Mr. Thompson is a highly qualified executive with a successful track record leading large consumer technology companies.”

Did this satisfy the detractors? Well, not really. Many expected the company to think out its position over the weekend and make a more complete statement on Monday. Late on Monday night in the United States, Thompson issued a statement apologising for the error, but giving no reason or explanation for it.

Third Point is now agitating to be given access to all company documentation about the due diligence on Thompson, and yesterday billionaire investor Warren Buffet said he finds it hard to believe that the error was “inadvertent”.

The question for leaders is how to respond when the crisis hits, and shareholders and the public demand answers – fast.

Full and honest disclosure

The experts LeadingCompany spoke to were clear: boards in these situations have to provide an honest and transparent response, quickly.

“I advise my clients to tell the truth. And to be transparent,” says Marjorie Johnston, director at Wordmakers.

“And behind the scenes, I would discuss, in a meeting with whoever was involved, why the correct information was not provided at the time it was meant to be. Sometimes those things are an oversight, but in this case, perhaps not.”

Andres Puig, a director at The Civic Group, says best practice is full disclosure right from the start.

“What did you know, when did you know, what did you do about it, and what steps have you taken to ensure it didn’t happen again,” he says.

How could this have happened?

Puig says he has some initial sympathies for the board, not in relation to how they’ve responded, but making the error in the first place.

“When you’re dealing with the CEO of company as high-profile as Yahoo, the board would be entitled to assume, at a bare minimum, someone at that profile had the qualifications they said they did.”

But Andrew Cross, a managing director of technology recruiter Ambition Technology, isn’t letting them off so easily.

“I would expect people at that level people to do a bit more due diligence,” he says. “It’s quite an administrative task to do the background checking on individuals, but the higher up you get, at the c-level suit, the more pressing it becomes.”

“I think it’s probably very prevalent across the more junior ranks, people will embellish directly or by omission… But the responsibility should be on both parties, both the employee to be honest and forthright, and also the potential employers.”

Puig says that once the error was discovered, the board is charged with making sure it doesn’t happen again.

When statements say little

“Holding statements” like that made by the Yahoo board on Friday, are rarely enough to keep people happy, Puig adds.

“The board would hope it’s the first and final statement they’d have to issue on the subject,” he says, adding that it doesn’t work because it doesn’t answer the questions shareholders are really asking.

“If [Thompson] said that he had a qualification that in fact he didn’t have, it opens up the suggestion that he was dishonest. So shareholders are asking if he had been dishonest about something as basic as that, are there other things he’s been dishonest about.”

“There’s a trend in public life at the moment that’s infected politics and large companies where people try to get away with providing only partial explanations, or to maintain a position clearly not credible in the face of all available facts,” Puig says.

“Shareholders and the broader public have had enough of it. They’re now being much more probing in questions that they ask. They want information and they want honesty.”

But what if the original statement was only ever intended as a first reaction, with a follow up planned. Would that be a good approach?

“No,” Puig says. “That’s a terrible tactic.”

“What you want to do is anticipate all the questions that will be asked, and deal with them as fully and as frankly as you can right from the beginning.”

“This stuff happens all the time – people aren’t honest about their qualifications or the extent of the things they were responsible for. But in a publicly listed company that’s accountable to shareholders, there is a high standard to be met. It’s not unlike the standard that government ministers have to meet.”

Too many companies let themselves be caught out

Yahoo appeared unprepared for the communications crisis. Alarmingly, they are not alone. Many companies have no plan for how to respond to emergencies.

PR firm Burson Marsteller interviewed 826 decision makers in the Asia-Pacific region. It found 46% of those interviewed had no crisis management plan at all. Of those who did have some sort of plan, half (47%) of those felt their current plan was insufficient to advise the company. Only 20% of those with crisis plans were confident it would help them to manage under pressure.

Third Point’s findings don’t put lives at risk, or do anything to immediately threaten the company’s revenues. But the affair is a crisis of confidence in Yahoo’s leadership. And perhaps in responding to this, the board simply wasn’t sure what to do.

It’s been a bad few years for Yahoo. While still very profitable, the company has seen its revenues eclipsed by competitor Google. After five CEOs in five years, shareholders were looking for a saviour, and many didn’t expect it to be Thompson. After all, his previous experience (he was PayPal president before joining Yahoo) was in digital commerce, but not advertising, Yahoo’s chief source of revenue.

Since this saga began, Third Point, who are Yahoo’s largest shareholders, have been calling for his head. Whether he manages to survive will be instructive to watch.