All seven independent directors of DNA testing company 23andMe resigned this week following major disagreements over the CEO's plans to take the company private, in what some may see as a sign of good fiduciary duty. Disagreements between company directors and management are common, but this dispute led to a board revolt. When a significant number of directors decide to resign at the same time, an investigation into the reasons for the disagreements may help other company boards avoid a similar fate.
23andMe once had a market cap of $3.5 billion, according to reports. The company's stock price has fallen by more than 96% over the past five years, and its current market cap is below $200 million. As the company continues to struggle, taking the company private was agreed to be an option for the CEO and board of directors to consider. Unfortunately, the acquisition plan proposed by CEO Anne Wojcicki was deemed unsatisfactory by the independent directors on the board.
In a letter of response to Wojcicki's proposal, the directors wrote:
“We are disappointed with the proposal for several reasons, including the lack of a premium to the closing price on Wednesday, July 31, the lack of committed financing and its conditionality. Accordingly, we believe your proposal is insufficient and not in the best interests of our unaffiliated shareholders… Importantly, we urge you to immediately withdraw your stated intention to oppose the alternative transaction so that we can fully evaluate whether third parties are interested in a transaction that will maximize value for all shareholders.”
So what prompted the independent directors to write to the CEO and ultimately resign?
First, it is important to recognize that both the CEO and the independent directors bear responsibility for the long period of underperformance of 23andMe's stock price. It would be great if they were now working together to restore positive outcomes for the company's shareholders, but that opportunity has ended with the resignation of the independent directors.
Here are some factors that can lead to conflict between directors and the CEO that other boards can avoid.
The urgency to improve the company's performance. None of the strategies the CEO and board agreed to implement over the past five years have worked very well, yet they have simply watched the stock price fall without making any major changes to stop it. This indicates a lack of urgency to correct the issues causing the poor performance, a lack of cooperation to address key issues as the stock price continues to fall, or they agreed on a set of strategies that simply failed. Whatever the reason, it appears the board waited too long to provide adequate oversight. The board formed a special committee this year to explore possible solutions, but by that point the company had become a penny stock. The board and CEO must demonstrate a greater sense of urgency in preserving shareholder value than they have demonstrated here.
Overseeing communications and relationships between the CEO and the Board. If a company's stock price continues to fall, why would the board and CEO not have substantive discussions about solutions? Many problems would not be solved if the board and CEO did not communicate effectively at all times. Evidence that there was a rift in the relationship and communication between 23andMe's CEO and board was confirmed when the board decided to write a letter regarding the handling of the company's situation. When the board writes to the CEO, it is almost always not a good thing. It generally means that the board has had discussions and has reached an impasse. That is exactly what happened here. Board oversight includes recognizing when communication between the board and management is ineffective and correcting it immediately. The board must insist on clear and effective communication between the board and management if it wants to maximize its efforts to enhance shareholder value.
Understand the voting structure of your board of directors. According to the independent directors' letter to Wojcicki, Wojcicki's proposal stated that they would “oppose any alternative transaction” other than taking the company private on the terms proposed by Wojcicki. The directors resigned when they realized that the CEO and his associates had the voting power to overrule the independent directors' efforts to “fully evaluate whether there was any third-party interest.” When an organization's voting structure is tilted in favor of the CEO, directors may have to reconsider how effective they can be in their oversight. In such cases, directors may want to monitor the situation closely and consider choosing to resign before the organization weakens to the point where they can do nothing.
