Twitter’s board of directors finally warmed to Elon Musk’s hostile bid and agreed to a sale – but not before it took a severe beating from the Tesla and SpaceX billionaire, Twitter founder Jack Dorsey, and other prominent users of their social network.
Musk, who on April 25, 2022, sealed a deal to buy Twitter for US$44 billion, criticized board members for owning almost no shares of the company they oversee. Dorsey, who will step down from his seat on Twitter’s board at the end of his term in May 2022, called it the “dysfunction of the company.” Conservative politicians derided the board as “scared” of free speech.
As experts on corporate governance, we believe this feud raises two critical questions: What purpose does a board of directors serve? And does it matter if a member owns company stock or not?
‘A bad board will kill.’
“Good boards don’t create good companies, but a bad board will kill a company every time.”
Venture capitalist Fred Destin wrote that in 2018, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently regarding Musk’s hostile bid. It even seemed to get a nod from Dorsey himself when he replied to a tweet containing the quote, “big facts.”
These tweets and the emerging general conversation have important implications for understanding boards and their role in shepherding a company.
A board’s most important roles include hiring, paying, and monitoring the chief executive officer.
Academic research suggests that board members at large companies – who typically receive generous compensation packages – may be limited to performing these tasks effectively. Our work found that boards often find it impossible to conduct adequate monitoring and rein in wayward CEOs because there’s so much information for modern boards to process with their limited time. And the social dynamics involved in the panel also make it difficult for directors to speak up and oppose other directors.
In a separate study involving face-to-face interviews with directors, we were consistently told that directors take their board service seriously and operate in their companies’ best interests. But they do so to collaborate with the CEO and the rest of the executive team rather than serve as impartial observers, as their “independent” status suggests they should.
While our work didn’t focus on this, if the board and the CEO fundamentally disagree about the company’s direction – which was often the case between Dorsey and the Twitter board – it would undoubtedly be problematic. It could lead to less than optimal decisions being made.
In other words, a board that isn’t functioning effectively can destroy a company’s value. And some reporting suggests that’s what happened to Twitter, whose shares were trading at less than half their 2021 peak before Musk disclosed he had amassed a 9% ownership stake.
A raider’s lament
That brings us to the following question: Does not own a significant stake in a company you oversee make it more likely that you’ll run it into the ground, as Musk seemed to suggest?
A few days after making his takeover offer on April 14, the billionaire, responding to a tweet showing how few shares Twitter board members to own, posted that its directors’ “economic interests are simply not aligned with shareholders.”
Musk’s arguments harked back to takeover bids from the 1980s in which activist investors – or “corporate raiders” – would argue that executives’ interests did not align with those of shareholders. As “Wall Street’s” Gordon Gekko famously railed against executives of a business he wanted to take over, “Today, management has no stake in the company!”
Musk’s words echo Gekko’s “greed is good” speech, except regarding independent directors, who comprise most corporate boards. The simple definition of an independent or outside director is that they don’t hold an executive role in running the company, such as a chief executive officer or chief financial officer.
Twitter’s board share ownership is very similar to other companies.
Excluding Dorsey, independent Twitter directors held a median ownership stake of 0.003%. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s company Tesla is similarly minuscule, at 0.23%.
Whether this makes a difference to a company’s success is hard to assess because research on the topic is relatively sparse, mainly because board members have so little equity.
Academic researchers on effective corporate governance in the 1970s argued that outside directors should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, management scholars have suggested that higher stakes could provide a way to motivate directors to monitor management and make decisions more in line with shareholder interests.
Some researchers have found that boards with more enormous ownership stakes can improve a company’s operational performance and better align outside directors with the interests of shareholders.
But other work that examined multiple studies shows the impact of director stock ownership is mixed at best, with some suggesting higher stakes potentially lead to adverse outcomes, such as excessive executive and director compensation.
Since the Sarbanes–Oxley Act of 2002, corporate governance issues such as board oversight have become increasingly important after massive accounting scandals at Enron, WorldCom, and elsewhere. This led to several changes intended to align the interests of managers and shareholders, including a focus on board independence and adjusting executive compensation.
Although our research shows boards are limited in their ability to monitor management, they’re still better than nothing.
Musk vowed to “unlock” Twitter’s potential as a private company without a public board in his letter to shareholders announcing his bid. We may soon see if he’s right.