Why Investors Should Watch this CEO Closely
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the technology sector, founders and CEOs usually have an enormous influence on the strategic direction of companies, and in most cases even a dominant position in the voting capital of the companies they founded. As opposed to the most balanced approach in which a strong board can help control the management team, this model has worked quite well in some cases, but other companies still need to demonstrate to investors that their founders deserve their concentrated power.
In 1985 Steve Jobs lost the fight for control over Apple (NASDAQ: AAPL) versus John Sculley and the company´s board. That was the beginning of an almost uninterrupted decline that turned Apple into a shadow of what it had been, and even threatened the company´s own existence.
It wasn´t until a few years after Jobs returned to the company in 1997 that Apple was in a clear recovery path. The launch of the iPod in 2001, followed by the iPhone and the iPad made Apple one of the most noteworthy success stories of the last decade, and Steve Jobs earned a well deserved place among the most renowned business leaders in history.
The return of Steve Jobs came with unquestionable authority over all kind of aspects regarding Apple, and it brought the company to unprecedented success. Shareholders and the press learned a very clear lesson from the Apple example: It's best not to argue with the brilliant entrepreneurs who founded the company and understand the business.
And entrepreneurs learned a lesson too, they knew they had to be careful if they wanted to keep control of their companies and avoid being pressured by outside investors or the board of directors. Larry Page and Sergei Bin, the founders of Google (NASDAQ: GOOG), took this matter seriously; they own shares of class B stock, which carry 10 voting rights each in comparison to one voting right for each class A share, so Google would have to issue enormous amounts of new stock in order for their holdings to be materially diluted.
Furthermore, last April Google announced that it's issuing a new class of shares – class C – which won´t have any voting rights; investors will receive a new class C share for each class A stock they own, in what could effectively be considered some unusual kind of stock split. Future equity grants for Google employees as well as shares issued for corporate acquisitions will be done in the new class of shares. After this move, the founding team at Google has cemented its rock solid position at the company's helm for a very long time.
According to Google´s management, this kind of control is necessary in order to avoid undue influence from shareholders, who can sometimes be too centered on short term profit numbers instead of long term product development. Page and his team claim that they are simply trying to make sure that no one will exert an undue influence on their long term strategic directions.
There is some truth in their point of view. Google has invested heavily for years in projects like Android or Chrome that yield no immediate financial results, but still position the company strategically to compete in a changing environment. Google was even harshly criticized by the media when it purchased YouToube for $1.65 billion in 2006, a price which in retrospect looks like a true bargain.
The lessons about corporate leadership learned from Apple seem to be supported by the Google experience, but that doesn't necessarily mean that other companies should follow the same path. Investors in Facebook (NASDAQ: FB), for example, have good reason to monitor Zuckerberg and his team closely.
The 28 year old founder of Facebook owns a special class of shares that give him 57% voting control of the social networking company, and he doesn't seem very shy at all when it comes to implementing strategic decisions. Facebook has been on a buying spree since its IPO, including the purchase of Instagram for nearly $1 billion without much consultation from the Board of Directors.
Will this acquisition in turn look like a smart move a few years down the road, just like it happened with Google and YouTube? Or is it an excessive price paid for a business without much economic viability?
Only time will tell for certain, but there are motives for concern considering that Zuckerberg hasn't shown the same track record that the Google team has delivered when it comes to long term strategic vision. In fact, the Facebook IPO was done without much concern for shareholders, which is not precisely the best introductory card Zuckerberg could give to the investment community.
The Apple experience has provided a management model that is widely followed in the tech sector, with the founders maintaining strict control over the company and its strategic direction. But not every company is the same, and not every entrepreneur deserves the same level of trust.
Mark Zuckerberg may become, more than young genius, a genuine business leader with the ability to lead Facebook into a sustainable and disruptive business model. But at this point he has a lot of power over the company and not much to back it up; his actions and decisions, therefore, need to be watched very closely.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
