How Improved Corporate Governance Accounting Can Prevent Another Yahooby
In a business environment that is rapidly evolving, it is imperative that management teams be aware of the range of opportunities and threats that could affect the organization. Emerging market competition, currency fluctuations, changes in interest-rate policies around the world, and, certainly not least of all, changing competitive demands from end users converge to create a mercurial and fast-moving environment.
2015 was a year punctuated by yet another type of business risk, amplified to a level previously unseen in developed markets: corporate governance and shareholder-oriented risk. Fueled by a large increase in assets under management, activist investors embarked on campaigns targeting virtually every industry and organization, including Apple Inc., PepsiCo, DuPont Co., and Yahoo! Inc.
In addition to activist campaigns aimed at improving returns to shareholders through increased dividends and restructuring of current assets, another issue lurked beneath the surface of virtually all of the aforementioned activist campaigns. While every activist campaign and organization is different, there do appear to be several core consistencies that can be analyzed. Ideally, if the key drivers that launch such campaigns are understood, these drivers can be negated or minimized, allowing the organization to focus on business functions rather than fending off activist overtures.
Drilling down to the core of the matter, activist campaigns are fielded and driven by the belief that the organization is undervalued in the marketplace (i.e., that due to current operation decisions, the organization is not receiving the full credit it is due). Depending on the specific narrative associated with the organization in question, there may be either one, or a multitude, of reasons as to why this is occurring, but the core issue remains constant. When confronted by such a campaign, and perhaps even included within the shareholder letter itself, is usually a clause stating that the market does not fully understand, value, or follow the business plan and value-creation strategy of the organization.
This lack of effective and clear communication represents a clear opportunity for accounting and finance professionals to step up and propose solutions to what is a rapidly growing issue for management teams in multiple industries.
Yahoo: Mismanaged Information
Focusing specifically on the issues and debate surrounding Yahoo, the lack of communication and clear dissemination of both quantitative and strategic information had a severely detrimental effect on the business itself, as well as on financial returns.
In essence, the activist campaigns beginning in 2013 centered around the fact that most of the value priced into the share price of Yahoo was linked directly to the ownership stake that the organization held in Alibaba Group Holding Ltd., the rapidly growing Chinese e-commerce juggernaut. In order to help fully unlock the value of Yahoo's core enterprise, it was argued, new senior leadership was required to expand the user base while also increasing the profitability of existing web traffic. Fast-forward several years, several expensive acquisitions and personnel decisions, and the IPO of Alibaba, and the situation was vastly changed. Increased scrutiny of core operations, combined with a lack of management narrative and strategy, led to a depressed valuation of Yahoo's core operations.
This saga, although just one example of poor corporate governance communication, is a pointed reminder of how quickly markets, investor sentiment, and large shareholders can become disillusioned with management. As 2015 came to an end, the effect of these cumulative miscommunications and subsequent dissatisfaction led to a confusing and convoluted discussion regarding the future of the organization.
Yahoo, under the advisement of large shareholders and outside consultancies, had proposed spinning off, in an event structured to be tax-free, the ownership stake remaining in Alibaba, worth between $30 billion and $32 billion, depending on the estimates utilized. Compared to the market capitalization of the organization as a whole, this meant that the market valued the core operations of Yahoo at essentially zero dollars, once cash and cash equivalents were backed out of the calculation.
Following the public disclosure of the proposed spinoff plan, however, certain shareholders and interested parties began to question the tax-free nature of this transaction, leading to very public debate among board members and the eventual cancellation of the spinoff. As 2015 came to an end, it appeared that Yahoo would now attempt to sell its core operations, selling itself, to either a media or telecommunications organization.
Improved accounting and management of the corporate governance process, while unable to solve the core issues plaguing Yahoo operations, would have enabled the organization to more effectively communicate both the issues being faced and management's plan to address these concerns. While Yahoo has been the focus of this discussion, the principles and tactics can and should be applied to any organization facing increased competition, organizational change, or a change in organizational strategy. Communicating and disseminating information to interested parties in a clear, consistent, and logical manner is essential for effective business decision-making.
How More Proactive Accounting Can Help
Accounting and finance professionals represent, at the core, the individuals and processes that manage the flow of information through an organization, and are already involved with virtually every aspect of operations. Organizations that face competitive challenges, compliance-related challenges, and threats on an industry-wide level must be able to effectively summarize and communicate information â both internally and externally â in order to successfully compete.
Working closely with IT services, corporate financial planners and analysts, as well as senior leadership, accounting professionals within organizations must produce information that is applicable for shareholders. Building on existing strengths embedded within the profession â specifically quantifying information, developing reporting templates and concepts, and working with other internal departments â it is increasingly obvious that a more proactive and strategic accounting function can add value to the organization.
In a business environment increasingly dependent on information and analytics, it is apparent that organizations must contend with both increased demands for information and demands for quantification of items linked directly to strategy. Examples abound â from Yahoo to Volkswagen AG â of organizations that failed to effectively track, quantify, and communicate information generated by the organization. Stakeholders â financial and nonfinancial â are an integral part of the business decision-making process, especially as specific organizations and business at-large expand internationally. Communicating information is not a solution for underlying problems and issues at the organization, but if the information is not communicated and analyzed, how can the problems be effectively addressed?
Accounting professionals willing to take a more strategic role and embrace the changing business environment are uniquely positioned to leverage existing skills to meet the needs of the market.
Sean Stein Smith is a professor at the City University of New York – Lehman College. He also is the chairperson of the NJCPA's Emerging Technologies Interest Group (#NJCPATech). He serves on the Advisory Board of the Wall Street Blockchain Alliance, where he co-chairs the Accounting Work Group. Sean is on the Advisory Board of Gilded, a...