Google gets low marks for governance

Search company gets another black eye, this time over how it treats its shareholders.

Dawn Kawamoto
Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
3 min read
Google's stock market debut may have gone off with a bang, but its shareholder practices have landed with a thud.

The search engine giant has received poor marks for its corporate governance efforts from bellwether advisory service Institutional Shareholder Services. ISS cited practices such as Google's dual class of voting rights.

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Google outperformed only 0.2 percent of the companies in the S&P 500, placing it at the bottom of ISS's Corporate Governance Quotient.

That ranking gives another bruising to Google, which had a number of stumbles in the run-up to its long-awaited public offering on the Nasdaq last week. And it comes at a time when public companies are under intense scrutiny over corporate governance issues in the wake of financial scandals at companies including Enron and WorldCom.

Google prides itself on its "don't be evil" motto, and heralded its Dutch auction method of going public as a way to level the playing field between individual and institutional investors.

But ISS argued that Google's governance structure put outside investors at a severe disadvantage to insiders.

"For now, shareholders must put all of their trust in an unproven senior management team and a board dominated by early-stage financial backers, who may have short-term interests that don't match those of other shareholders," ISS said in a statement. The company declined to comment on ISS' corporate governance rating.

ISS provides institutional investors, such as mutual fund and pension fund managers, with advice on how to vote on proxy matters, as well as providing reports on corporate governance issues. Because ISS can influence how a large number of stakeholders will vote on any given issue, the public companies that are the target of their recommendations or advisories tend to take note.

Among the criticisms in its latest report, ISS highlighted Google's two classes of stock and its two-tier voting rights, with class A shareholders receiving one vote per share and class B investors receiving 10 votes per share.

"The company's super voting rights structure gives insiders 10-votes-per-share compared to one-vote-per-share for participants in the IPO," ISS said. "The last-minute decision to scale back the number of existing pre-IPO holders' shares to be sold in the offering guaranteed that insiders will have 'carte blanche' authority in running the company over the near term."

ISS also said that less than two-thirds of the company's directors are "independent" and that its chief executive is involved in more than one "related party" transaction.

As Google's IPO drew near, the company got into trouble with the Securities and Exchange Commission for an interview with company founders Larry Page and Sergey Brin that appeared in Playboy while Google was supposed to be in a quiet period. The SEC had already been looking at the company for failing to register a group of insider stock options.

Critics had raised eyebrows over some corporate governance issues, in particular a stock class structure that gives insiders far more power to control the company than average investors.

Despite the hiccups, the stock performed well in its debut, jumping 18 percent on the first day of trading.

And although the ISS report gave Google low marks on corporate governance issues, it did look favorably on some of the company's practices.

Google has an audit committee, as well as a compensation committee, that consists of only independent outside directors, ISS said. It also has established a corporate governance committee, regularly reviews the performance of its board and has a CEO succession plan, the report said.

CNET News.com's Paul Festa contributed to this report.