Proxy service gives Google low marks

Its governance is rated in bottom 1% of S&P 500

August 24, 2004|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

Google Inc.'s initial public offering may have captured investors' fancy, but a leading proxy voting advisory service says its corporate governance leaves a lot to be desired.

Institutional Shareholder Services, which advises big investors on governance issues and proxy votes, gives the online search firm a minuscule 0.2 percent score on its widely followed corporate governance quotient, meaning it ranks in the bottom 1 percent of all Standard & Poor's 500 companies.

Among other software and services companies, its score is 8.8 percent, meaning 91 percent of the firms in its industry have higher scores.

"You ask me, I'd say those numbers sound pretty darn awful," ISS corporate governance expert Patrick McGurn said in a recorded message to clients, calling the firm's governance structure "substandard."

Google spokesman David Krane said yesterday that the company would have no comment.

Among its concerns, ISS faults Google for its widely criticized dual classes of stock, which give the founders, employees and directors voting control over the company.

"Rank-and-file shareholders have no meaningful avenue for recourse - other than selling their low-vote shares, of course - if the company loses its way," McGurn said.

Because of its voting concentration, Google could opt out of some provisions of the Nasdaq stock market's listing requirements, including the rule that most directors be independent.

In Securities and Exchange Commission filings, Google says its charter precludes opting out without a two-thirds vote of shareholders, but McGurn said insiders could muster that easily.

As is, ISS said, less than two-thirds of directors are "independent outsiders" by its definition, which says essentially that directors can have no connection to the company other than their board seats.

Google's nine-person board has three company employees, including founders Larry Page and Sergey Brin.

ISS also points out Google's decisions to allow repricing of stock options and not to expense options; its failure to disclose whether it has stock ownership guidelines for executives and directors; and whether it limits directors' other board service.

In its SEC filings, Google acknowledges that expensing stock options under the fair value method "could significantly reduce our net income."

The proxy voting service also points to potential conflicts of interest with the company's use of a plane owned in part by chief executive Eric Schmidt.

On the plus side, ISS credits Google with deciding to separate its chairman and CEO posts, electing directors annually, and not having an anti-takeover device called a poison pill. It also notes that all directors with more than one year of service own company stock and that directors receive all compensation in equity.

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