Twitter Board Fight Shows Why Directors Should Evaluate CEOs Regularly

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An earlier appraisal of CEO Dorsey would have helped to avoid an activist investor battle—and the appearance of having lost it.

One of the most difficult things a corporate board should do regularly is evaluate its CEO. Twitter’s board recently found that neglecting to do so, invites significant risk.

Activist investor Elliott Management, which recently took a $1 billion stake in Twitter, has forced Twitter’s board to evaluate CEO Jack Dorsey to determine whether it’s in the best interest of the company to continue to allow him to hold the position of CEO at both Twitter and mobile payments company Square. Dorsey has held the two CEO positions since 2015. Investors aren’t pleased.

Elliott Management founder Paul Singer maintains that Twitter is underperforming relative to Facebook and other social media platforms. He believes Dorsey has been distracted by his efforts to develop Square and that Twitter would be better served by having a full-time CEO. To avoid an ugly proxy fight, Elliott Management and Twitter’s board reached a compromise: Twitter will take on a $1 billion investment from private equity firm Silver Lake to help fund a $2 billion share repurchase program to quiet investors dissatisfied with the company’s performance and in exchange, Elliott Management and Silver Lake will each add a director to Twitter’s board, the company will seek an additional independent director and the board will create a temporary committee to review Twitter’s leadership structure.

It’s really unfortunate that the Twitter board allowed this situation to unfold in this way. It’s reasonable to think that an unbiased evaluation of the CEO at some point during the last five years would have resulted in clear evidence that allowing Dorsey to hold two CEO positions at the same time was, or was not, in the best interest of both companies. Yet, Dorsey’s arrangement has been in place for five years with no clear explanation from the board of the benefits.

Twitter’s board must now deal with the appearance of having been forced to evaluate Dorsey and present evidence that supports keeping him as CEO. The fact that Elliott Management pushed for board seats suggests that many shareholders don’t believe a credible argument to keep Dorsey in both CEO positions exists. Now that the reshaping of Twitter’s board has begun and a committee to review its leadership structure will be formed, an unbiased review of Dorsey as CEO will likely take place. The committee’s findings and a succession plan will be shared with all shareholders. The board should have made this happen before Elliott Management stepped in.

Evaluating a CEO can be extremely difficult because, in many cases, directors may owe their position on the board to the CEO and therefore feel a sense of loyalty that might impact their decision making.  Alternatively, once board members have selected a CEO to lead their company, they may then feel conflicted if it becomes necessary to remove that CEO or oppose business decisions he/she may want to implement. Giving them the benefit of the doubt, it’s unclear what’s really been at play on Twitter’s board.

What is clear is that Twitter’s situation demonstrates that there can be great value in the regular evaluation of a CEO.  Proper assessment gives the board an opportunity to determine if expectations for performance of the CEO and business operations that were previously set have been achieved and remain on target. It’s up to each board to create its own criteria for evaluation based on the qualities directors feel the CEO most needs to be successful. These criteria are subject to change due to the company’s industry, market conditions, peer group financial performance and shareholder concerns among other things. There should be clear benefits for CEOs who achieve goals and clear penalties for poor performance.

Regular evaluations allow the board to tell the CEO how they are doing under the current criteria and what adjustments might need to be made going forward. Proper assessment can also allow the board to determine if the CEO is seen as an influential leader by his industry, employees and shareholders – that’s a characteristic that carries more weight these days. Additionally, the board can see if the CEO is adding new skills. Skills that were coveted five years ago may not be as important over the five years to come.

Only through proper assessment and evaluation can a board determine if they have the right person to run their company at a specific moment in time. Directors should take note that boards must be willing to change their CEO when the situation dictates. As we enter a new decade, Twitter shareholders want to know who the board believes is the right person to run the company. Too bad it has taken a board battle to get an answer to that question.

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