The situation between eBay and Carl Icahn feels like it has escalated beyond business, to the intensely personal. Icahn keeps lobbing pointed criticism of the company, while CEO John Donahoe defends his record and corporate director and venture capitalist Marc Andreessen fights right back.

We don’t have a view about whether eBay should split PayPal, the proximate cause of all this. Nor do we have a view as to whether eBay left billions of dollars on the table when it sold Skype to Andreessen’s firm.

The debate does, though, remind us of some of what we despise most about governance in the US, and in tech companies specifically.

Typical Icahn Activism

This one actually started somewhat quietly. Icahn put together a 2% position in eBay, and called for eBay to spin-off its PayPal subsidiary. eBay of course wants to keep the company together.

Icahn plans to nominate two director candidates that will advance his plan. Unusually, he also wants shareholders to consider a nonbinding resolution on PayPal at the upcoming annual meeting (date TBD, last year’s took place on April 18).

Icahn notified eBay of his nominations and resolution in mid-January. eBay disclosed this in its earnings call a week later. About a month of private discussions ensued, including at least three phone calls between Icahn and Donahoe.

The situation deteriorated quickly after that. In a series of “open letters” to other eBay investors, Icahn levels serious accusations  of conflict and self-dealing at the eBay BoD, and executive incompetence at Donahoe. Among other charges, he claims that eBay sold Skype to Andreessen’s firm for a song, only for Andreessen to sell Skype to Microsoft for a hefty profit within a couple of years.

He also thinks that directors  Andreessen and Scott Cook, also CEO of Intuit, ignore obvious conflicts of interest in serving on the eBay BoD. He asserts that both of them have significant relationships with competitors: Cook’s Intuit has a payment processing business, while Andreessen’s firm invests in payment processing businesses, all similar to PayPal.

We don’t have a view about whether eBay should spinoff PayPal, although we encourage any healthy debate on that issue, as with any material subject at any portfolio company. We also don’t know whether Andreessen paid a fair price for Skype or stole it, although his immense profit only months later suggests that eBay might have missed something. Icahn’s comments about BoD independence do ring true, as the entire mess illustrates the chronic problems with governance at eBay, at tech companies, and at US companies overall.

eBay Corp Gov Is at Best Mediocre

The company entrenches its directors well:

1. ❖classified BoD (which it will declassify by 2015)
   

2. ❖no action by written consent
   

3. ❖BoD can amend bylaws without shareholder approval.
   

Yet, shareholders can call special meetings (25% of the outstanding shares), and there’s no poison pill (yet).

More objectively, eBay doesn’t score especially well or poorly based on GMI Ratings corp gov evaluation, earning a “C” on their most recent report card. We’d hope for better, but it actually compares favorably relative to other tech companies.

Silicon Valley Corp Gov Is Also Mediocre

GMI Ratings also gives corp gov in the IT Services industry a “C”, and even the entire Technology sector a “C”. Both segments having slightly lower numerical ratings to earn those letter grades compared to eBay.

This industry, of course, is the same one that gave shareholders options backdating, a Facebook IPO (and others) that leaves effective control with its founders, and a JOBS Act that strips some key protections from IPO investors. Tech executives and investors think that their commitment to innovation and value creation excuses poor corp gov practices. They even promote entrenchment as a means of freeing their precious industry from the prying eyes and pressure of ordinary owners of their common stock.

Silicon Valley thrives on relationships, no less than any other economic niche. Friends invest in each others’ projects, license each others’ patents, and serve on each others’ advisory boards.  So, when companies, especially fast-growing ones that change the world, take public money, where do mere shareholders come off telling these wealth creators how to run their businesses?

As deficient as eBay and the tech sector are at corp gov, the rest of the economy is even worse. GMI Ratings gives the S&P 500 overall a “D” rating for corp gov.

Corrected on 3/11/14 to reflect updates in eBay BoD structure