May 6, 2004

Analysts said that the decision to split the chairman and chief executive positions is probably a response to the broader trend in favor of better corporate governance.

Little noticed in Google Inc.'s filing to go public last week is the fact that Eric Schmidt, the Internet search company's chief executive, no longer holds the title of chairman.

The change leaves that position unfilled and raises the questions of not only who will be Schmidt's replacement, but also what exactly happened.

Separating the powers is intended to make boards more responsive to shareholders rather than a rubber stamp for management decisions.

"The point of having a separate CEO and chairman on the board is to create a balance of power," said Paul Hodgson, a senior research associate with Corporate Library, a private research firm in Maine focused on corporate governance issues.

Hodgson said that Google, which is based in Mountain View, appears to be preparing to bring in an outsider as chairman. If so, he said it would be "in line with best corporate practices."

Google's move follows the lead of several other companies that have split the chief executive and chairman jobs, including such technology firms as Siebel Systems and Dell.

In both cases, the chairmen are former chief executives. Hodgson complained that such chairmen are still allied with management and therefore not truly independent.

In fact, Hodgson said only 25 companies in the Standard & Poor's 500 actually have chairmen from outside the company.

They include such Bay Area companies as JDS Uniphase, the networking firm; Clorox, the consumer products-maker; and Solectron, the computer parts contractor.

"It's an increasing trend," Hodgson said, "but there's a lot of entrenched CEOs out there who don't want to give up power."

Whether Schmidt gave up the chairman's role willingly is not clear. Google's bylaws allow an employee to become chairman as long as the individual has the support of two-thirds of the board of directors, according to the company's filing for an initial public offering last week.

Analysts mentioned that Google bylaws may expressly give leeway for the chief executive to return as chairman if the effort to split the leadership roles does not work out.

Schmidt, the former chief executive of the software company Novell, was hired as Google's chairman in March 2001.

He relinquished the title last month, according to Google's filing, but remains a director and leads the executive committee. He continues as chief executive, a position he took in July 2001.

Google is already under fire over its management structure, which gives insiders overwhelming control.

The company has adopted a controversial corporate governance structure in which executives and directors hold stock carrying 10 votes per share, while retail investors will get shares that count for only one vote.

"Some of the expected backlash because of ownership and corporate governance could have swayed them to divide the chairmanship and the CEO," said Mark May, an analyst for Kaufman Bros., an investment bank.

Analysts were divided over who will replace Schmidt. They agreed that his replacement will probably be named before the company's shares begin trading publicly, which is expected in a few months.

Martin Pyykkonen, an Internet analyst for Janco Partners, an investment research firm, expects the chairman's job to attract a lot of interest, given Google's high profile.

And given the company's growth, the job will be time consuming, grappling with such issues as future acquisitions, new online features and an expanded computer infrastructure, Pyykkonen said.

Likely candidates will come from such industries as software or advertising, Google's main source of revenue, according to Pyykkonen.

Another analyst, Mark Argento, of ThinkEquity Partners, said that Google may have enough Silicon Valley types and may look elsewhere.

Serving on a company's board can be the first step toward becoming chairman. The directors on Google's board from outside the company, excluding the venture capitalists, include Ram Shriram, a former Amazon.com executive; Arthur Levinson, chief executive of Genentech; John Hennessy, president of Stanford University; and Paul Otellini, president of Intel.

Whatever the case, the analysts said that a new chairman will have to deal with Google's unusual management structure.

In the filing last week, Larry Page and Sergey Brin, founders and co- presidents, said they shared decision making with Schmidt, as a triumvirate.

"You will have to reconfigure the boardroom table so you can get them all at the end," said Argento, the analyst. He added that even at Google, which prides itself on being unconventional, "they can't have a lame duck chairman. It's not good business."

Source: SF Gate.com

        

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