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Brady Shiplet

February 1, 2010

Org Theory

Article #8

Google Retains Power

In 2004, Google had just become a public company. There were some issues surrounding their

corporate governance. On page 29 of the prospectus released on Aug. 18, Co-founders Larry Page and

Sergey Brin and CEO Eric Schmidt "run Google as a triumvirate," the prospectus declares. Notice theuse of the present tense -- and a term of governance that implicitly ignores a role for the board,

institutional shareholders, and, well, just about everyone else.

Missing are almost all the tools that shareholders in other public companies use to assert their rights as

owners. Supervoting rights are accorded to the Class A shares, mergers could require the approval ofinvestors representing 60% of the votes, and the board can change the bylaws without shareholder

approval. All of which means investors have two choices: They can watch what happens or vote with

their feet. Influencing how Google is run isn't an option.

What's more, under the terms of the stock-option plan, repricing is explicitly allowed -- so if the stockplummets, Google can reward those responsible by restoring the value of their options, even as regular

shareholders give up their plans for early retirement.

The board also has its share of potential conflicts. The nominating committee, which chooses new

directors, includes L. John Doerr, a partner at the venture-capital firm of Kleiner Perkins Caufield &Byers, an early Google backer. Under Nasdaq rules, Doerr is an independent director, but ISS considers

him an "affiliated outsider" -- a nonemployee director who has a business relationship with the

company. ISS considers that inappropriate for a committee that should be completely independent.

The stakeholder model of corporate governance places the board of directors in the central position to

balance the interests and conflicts of the various constituents of the company. The failure to balance

stakeholder interests can result in a failure to maximize shareholders wealth. The real problem occurs

with Google in the arena of loyalty. The duty of loyalty means that all decisions should be in theinterest of the corporation and its stakeholders. An insider-dominated board could easily pack the

compensation committee with current and former execs and erect formidable takeover defenses such as

staggered board elections. Is Google possibly too loyal.

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The triumvirate says it opted for an unconventional system of governance because the traditional

structures weren't good enough. Google execs, wary of being beholden to Wall Street's short-term

financial interests, seem to believe that being responsible to shareholders will interfere with their ability

to keep Google a leading innovator in a competitive market. That notion will no doubt come as asurprise to other innovative companies in competitive markets such as Pfizer and Intel, which have

sterling governance reputations.

In the end, how the Googlers manage their company may not make a difference. As long as it earns

money, few investors will care that the CEO is doing business with his own company or that each oneof their shares entitles them to a single vote while insiders get 10. Following this ideal into 2009, it

seems that Googles governance has not halted investors from pouring money into the company. It

seems that Googles loyalty lies with innovation and investors are OK with that.