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January 25, 2000
Will Dot-com Businesses Rewrite the Rules of Corporate Governance?
A conference hosted by IRRC draws attention to how high-tech businesses will shape, and be shaped
by, the corporate governance movement.
SocialFunds.com --
The dramatic growth of Internet and other high tech businesses in the last five years has clearly
transformed the U.S. economy, and it is far from over. A recent conference hosted by the Investor
Responsibility Research Center (IRRC) contrasted the governance of these infant corporations with
the growing consensus of corporate governance activists.
 The governance2000.com Conference took
place January 20-21, 2000, at the Wharton conference center at TIAA-CREF, in New York City. The
conference was co-sponsored by IRRC, a leading source of independent research on corporate
governance issues, along with Arthur Anderson & Co., INVESCO, and TIAA-CREF.
"While some
of those speaking at the conference advocated giving these relatively young companies time to adopt
governance practices," said Robert Newbury, Deputy Director of IRRC's Corporate Governance Service,
"others strongly disagreed, saying that in order to survive in that fast-paced, competitive
industry, these companies must have strong governance principles in place."
The
conference featured keynote addresses by Dr. Gilbert Amelio, President of AmTech, J. Patrick
Campbell, chief operating officer of NASDAQ, Jeffrey Dachis, President & CEO of Razorfish Inc., and
John Little, founder and CEO of Portal Software Inc. Panel discussions walked the tight-wire
between dot-com company practices and corporate governance, shareholder activism, and corporate
responsibility.
Razorfish President and CEO Jeffrey Dachis pointed out that while dot-com
companies may want to adopt good governance practices, it's not always easy, especially in the
highly competitive and dynamic industry they operate in. "We want aggressive bright people who 'get
it' on our board," Dachis said, "not representatives of corporate America who are interested in
protecting the status quo."
A previous study by IRRC found that Internet companies have
boards that fall short of accepted good governance practices. Compiling information from a list of
39 companies listed on the Inter@ctive Week Internet Index, IRRC found that Internet boards are
smaller, have fewer independent directors, and depend less on board committees than other U.S.
corporate boards.
"Their smaller size helps Internet companies' boards meet more
frequently in order to respond quickly to the industry's rapidly transforming technologies and
market dynamics," said Newbury, the author of the study. The average Internet company's board
consists of seven directors, much smaller than the average of 12 for S&P 500 companies, while some
such as Amazon.com, have boards of only five directors.
On average, 53 percent of the
directors serving on boards at the dot-com companies surveyed are considered independent, compared
to 67.6 percent for the boards of S&P 500 companies. Governance experts say that boards should have
at least a majority of independent directors to assure that the company's best interests are
served, many internet companies fall short of this.
"At companies such as Yahoo! and
PSINET, half of the board members are executive insiders, creating situations where management is
permitted to oversee itself unencumbered by the vigilance of an independent board," said Newbury.
But the rate at which internet companies have established committees to monitor corporate
governance issues is the most telling sign of the disregard for governance practices among internet
company boards. While the number of S&P 500 companies that have established committees charged with
monitoring corporate governance issues is more than 50 percent, only 6 percent of the Internet
companies surveyed have established a corporate governance committee.
The prolific use of
stock options as a means to compensate "the entrepreneurial class" at high-tech companies also drew
attention at the conference, particularly with investors. In addition to bringing up issues of the
value of workers at all levels, stock options also threaten to dilute the value of the stocks held
by other shareholders.
Although representatives from many high tech companies supported
their divergence from accepted governance patterns, Gilbert Amelio, president of AmTech and former
CEO of Apple Computer asserted that all companies must have guiding principles. "There is no reason
why new technology companies can't operate under old corporate governance practices," Amelio said.
The governance2000.com conference provided an important forum for addressing some of these
issues, and for hearing opinions from all stakeholders in Internet and other high tech industries.
It was an important landmark in the evolution of corporate governance, and in how we view
governance issues in the emerging Internet industry.
www.irrc.com
©
SRI World Group, Inc. All Rights Reserved.
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