The Founder Factor(avc.com)
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The Founder Factor
http://www.avc.com/a_vc/2010/01/the-founder-factor.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AVc+%28A+VC%29&utm_content=Google+Reader
16 comments
Google is a unique company and its Founders are in a unique vantage point that I doubt that many of us struggling entrepreneurs would share. However, this article is a thought-provoking good read for anyone who is a Founder/CEO of a startup, who are both the owner and the executive. In fact, in the beginning of the startup, being the Founder means that you own 100% of the company but at the same time, you are also its first employee. Interestingly, these two distinct roles provide two different and potentially conflicting sets of responsibilities. As an owner, your responsibility is to yourself and your family and you are free to make any political statement that you wish to make. On the other hand, being an executive means that you have accepted a fiduciary duty and the mandate to protect the interest of your shareholders. In any case, I beleive Google leaving China would be a devastating blow to the Chinese citizens AND to the Google shareholders.
I think one could make two strong arguments that Google leaving China makes good business sense, and is not just a warm-fuzzies thing.
First of all, whoever broke into Google’s servers and collected confidential data from them made Google look like a chump. Given that Google’s long-term business plans seem to involve convincing lots of people to entrust even more sensitive data to Google’s servers, Google has a strong interest in not looking like a chump.
Second, if the PRC government has veto power over what search results Google can show, and Google’s ability to compete depends on the quality of its search results, and the government favors Chinese-based companies that it can control more closely... perhaps the deck is just so stacked against Google that it would get more ROI doing business in a less authoritarian country.
First of all, whoever broke into Google’s servers and collected confidential data from them made Google look like a chump. Given that Google’s long-term business plans seem to involve convincing lots of people to entrust even more sensitive data to Google’s servers, Google has a strong interest in not looking like a chump.
Second, if the PRC government has veto power over what search results Google can show, and Google’s ability to compete depends on the quality of its search results, and the government favors Chinese-based companies that it can control more closely... perhaps the deck is just so stacked against Google that it would get more ROI doing business in a less authoritarian country.
Google is still the most open search engine in China. In some way, Google is the Voice of America. Should we have shut down VOA just because the other side decides to jam our signal? By the way, I should have edited the end of my comment to say that it is devastating to the Chinese citizens in the short run and devastating to the Google shareholders in the long run since currently Google is getting less than 1% of its revenue from China, so shutting it down really doesn't hurt Google's bottomline. In any case, I grew up in communist China and had lived on the other side until I was a teenager and I really appreciate the benefits that even an suboptimal communication channel would bring to the Chinese people. The alternative is simply unacceptable.
Google's board and executives have a fiduciary responsibility to the shareholders to do what is in the best interest of shareholders -- not Chinese dissidents. It doesn't matter if those executives are founders are not.
All the warm and fuzzy about leaving China won't stop shareholders from suing google if it turns out a decision to leave China has impacted them negatively.
All the warm and fuzzy about leaving China won't stop shareholders from suing google if it turns out a decision to leave China has impacted them negatively.
This would be an unwinnable lawsuit. For all the hype, China is a tiny market for Google, and Google can provide a good business rationale for the move (hurts the brand, threatens their infrastructure etc.) Courts are loath to second-guess management except in cases that are exceptionally clear cut.
See Yahoo's refusal of the Microsoft takeover bid for a far more dramatic example of the latitude management has to take decisions that appear to lose the company money.
See Yahoo's refusal of the Microsoft takeover bid for a far more dramatic example of the latitude management has to take decisions that appear to lose the company money.
I could be totally off base with this, but sometimes I think Neal Stephenson is at fault here for putting so much emphasis on the idea of fiduciary responsibility and lawsuits resulting from perceived neglect of that responsibility. I remember he made a big deal out of that in Cryptonomicon, and I think it's become kind of a meme. My impression is that it's not such a large concern in most cases, especially for a large company with different voting rights for different classes of shares like Google.
Maybe grellas wants to weigh in here?
Maybe grellas wants to weigh in here?
Corporate boards do have tremendous latitude under the so-called "business judgment" rule, i.e., the rule that says they are to act in the best interests of the company and its shareholders. Under that rule, boards have huge latitude to exercise discretion without being at risk of violating fiduciary duties unless they engage in what is called a "self-interested transaction."
To underscore the difficulty of pursuing a lawsuit claiming breach of fiduciary duty, consider this: I have seen first-hand public companies where a VC-controlled board will use a company's resources to cause the company to acquire bum companies in which the VCs had prior investments (sort of like privately funded bail-outs at company expense); even something so extreme proved to be a very tough case to prosecute given that the VCs who controlled the board had so-called "independent directors" bless the deals.
Taking a corporate action based on so-called corporate responsibility would very likely fall on the safe side of the line for the voting directors in most cases. Business judgment is business judgment and it might be argued that it is good for business for a corporation to position itself as being "green" or "fair to dissidents" or whatever else might be perceived as a good thing to do apart from pure financial motives. If they did so where the economic impact were obvious and highly negative, however, this would certainly subject them to class-action lawsuits and would, in my judgment, be irresponsible conduct by the directors - but this would have to be an extreme case, e.g., (to put it in absurd terms) the Google founders suddenly determining that there are higher purposes in life besides making profits and thereby pulling Google out of its core business because it led to the sin of making profits. This is just another way of saying that, though the business judgment rule gives directors extreme latitude, such latitude is not limitless.
I think, on balance, that the social-responsibility stuff falls in a gray (but relatively safe) area under the technical terms of current corporate law. That said, directors do not want to be seen as doing anything contrary to the shareholders' interests in making profits and that is why recent proposals have all focused on giving shareholders the right to impose these sorts of things on the board via extraordinary votes. Such proposals have gone nowhere to date and, where shareholder advisory votes have been taken, the social-responsibility stuff tends to go down in flames. Shareholders do want to make money, after all. The post here, then, is correct that it takes a pretty extraordinary situation, such as a dominant founder or two controlling things, for this to happen.
To underscore the difficulty of pursuing a lawsuit claiming breach of fiduciary duty, consider this: I have seen first-hand public companies where a VC-controlled board will use a company's resources to cause the company to acquire bum companies in which the VCs had prior investments (sort of like privately funded bail-outs at company expense); even something so extreme proved to be a very tough case to prosecute given that the VCs who controlled the board had so-called "independent directors" bless the deals.
Taking a corporate action based on so-called corporate responsibility would very likely fall on the safe side of the line for the voting directors in most cases. Business judgment is business judgment and it might be argued that it is good for business for a corporation to position itself as being "green" or "fair to dissidents" or whatever else might be perceived as a good thing to do apart from pure financial motives. If they did so where the economic impact were obvious and highly negative, however, this would certainly subject them to class-action lawsuits and would, in my judgment, be irresponsible conduct by the directors - but this would have to be an extreme case, e.g., (to put it in absurd terms) the Google founders suddenly determining that there are higher purposes in life besides making profits and thereby pulling Google out of its core business because it led to the sin of making profits. This is just another way of saying that, though the business judgment rule gives directors extreme latitude, such latitude is not limitless.
I think, on balance, that the social-responsibility stuff falls in a gray (but relatively safe) area under the technical terms of current corporate law. That said, directors do not want to be seen as doing anything contrary to the shareholders' interests in making profits and that is why recent proposals have all focused on giving shareholders the right to impose these sorts of things on the board via extraordinary votes. Such proposals have gone nowhere to date and, where shareholder advisory votes have been taken, the social-responsibility stuff tends to go down in flames. Shareholders do want to make money, after all. The post here, then, is correct that it takes a pretty extraordinary situation, such as a dominant founder or two controlling things, for this to happen.
Thanks!
With the way Google's corporate structure is set up I do not think the general shareholding public have the power to sue Google in such a fashion.
Separately, I think that as more of the story comes out we will see that this move is in Google's best interest; as difficult a decision that leaving China is. I've mentioned in other places that there is probably a lot more going on here. Today Techcrunch reports, http://www.techcrunch.com/2010/01/14/google-china-holiday-le..., that Google is sending their China staff home on early holiday. One can imagine a scenario where someone planted hard/soft hacks or network snoops directly at Google China HQ.
Separately, I think that as more of the story comes out we will see that this move is in Google's best interest; as difficult a decision that leaving China is. I've mentioned in other places that there is probably a lot more going on here. Today Techcrunch reports, http://www.techcrunch.com/2010/01/14/google-china-holiday-le..., that Google is sending their China staff home on early holiday. One can imagine a scenario where someone planted hard/soft hacks or network snoops directly at Google China HQ.
Boards and executives have more responsibility than that: they must obey the law, look beyond the next quarter, and behave in a moral fashion. Corporations turn into soul-less carnivours if "fiduciary responsibility" is the only driving force.
That was Fred's point -- Sergey and Larry hold a controlling stake still in Google. So Google's best interest is still to meet their best interests which aren't necessarily financial.
Sergey and Larry hold a controlling stake because there is a dual class of Common stock where the Founders' stock has 10x the voting power per share compared to normal Common stock.
Sergey and Larry have something like 30% of the equity combined but held 85% of the voting power.
Sergey and Larry have something like 30% of the equity combined but held 85% of the voting power.
Does "fiduciary responsibility" mean "represent the voting stockholders" or "represent all the stockholders"? I believe the latter. Which puts executives in a bind when those two populations differ.
I believe by "voting power" he means the voting power if everyone turned up to vote. That's a shitload a stock, huh?
If they put it to a shareholder vote and everyone decides leaving china is good that is fine. If they make a vote among a few insiders at the top and leave china and then it turns out billions in market cap are lost as a result, I'm almost certain there will be a lawsuit.
There are probably plenty of cases where non-founders were instrumental in success too, in fact Google may be one. Schmidt has undoubtedly been instrumental in Google becoming the juggernaut it is.