Google's IPO and some insights on corporate governance
Google appears to flout many of the basic standards of publicly traded corporations - quarterly reporting, management by a team rather than a traditional CEO, the dilution of voting rights on new shares, etc.
Regarding the public offering, the founders state that "the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google's past success and that we consider most fundamental for its future."
In fact, the founders go further, showing that they do not trust the public markets, even taking pains to emphasize that they are going public even though they do not need the money, for instance writing that "a management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour."
Strong words, especially coming from one of the most successful technology start-ups ever. It caused me to consider what we can learn from Google and (maybe) apply to public companies in Poland (or other emerging markets).
Candor and running a public company like a private one
Google is almost required to go public. Because of its size, Google would soon need to report by law certain financial information, changing its past practice of keeping business information closely held. Therefore, it appears that the founders have decided to go public but retain as many aspects of the private company that they built as they can.
What appeals to so many readers of this prospectus is its candor in doing this.
So many veterans of Wall Street privately chafe at many of the normal practices of the exchanges. Quarterly thinking (for instance - meeting targets and giving guidance for the next quarter), does not reflect the way the real world works. It also tends to distort the view of success in those companies - as they will tend to organize and work to that quarter. Not every company really needs a short-term discipline to achieve its goals anyway.
Google, as part of its promise not to focus on quarterly results, also promises to report results candidly - even 'lumpy,' if that is how they appear. Of course, this is refreshing, especially after an age of obscure earnings reports based on (and sometimes manipulated by) accounting considerations that are intentionally difficult to decipher.
The founders also promise not to stop taking the risks that have helped Google to grow so large (according to them, 20 percent of their projects will fail). They also will not alter the company's unique corporate structure (it is run by a triumvirate rather than a traditional CEO) just to suit the market.
Google also makes an explicit commitment to corporate ethics. In the 'Don't Be Evil' section of the prospectus, it outlines this commitment in the kind of clear terms not typically found in corporate codes of conduct or mission statements. The Google approach to ethics is clear - and that is what makes it difficult for most corporations to match.
Google is the most important public offering in the last few years. It is also an incredibly successful company, with an operating profit of $340 million (zł.1.3 billion) on sales of $960 million (zł.3.7 billion). If not for these factors, the hubris of the founders might be seen as more than arrogance by detractors. However, because of their success, they are allowed to be bold. I believe that this boldness is good for the public markets - especially out here in emerging markets, where it is all too easy to believe that the formula set out by the wise and efficient 'markets' is the only alternative.
The prospectus of Google reminds many of Berkshire Hathaway, and is in fact inspired by Warren Buffet. Of course, Berkshire Hathaway is one of the best performing stocks of all time - even though its corporate structures are not in keeping with modern governance 'best practices.'
I am also impressed by the plans of the founders to give a part of the shares and profits (one percent) to a non-profit Google Foundation that they are establishing to address issues such as poverty, human rights and the environment. It raises the bar of corporate social responsibility - most of which is self-serving public relations palaver.
Legitimate Concerns
On the other side, there are some issues with the public offering of Google. The main one is that the new shares are going to be issued with significantly diluted voting rights (one tenth of the value of the founders' shares). This promises to keep control of the company with closely held insiders.
The main risk is that this structure works only as long as the company is performing well. If Google falters - especially in the face of what will be increasing competition from other entrants into the search engine market or as the result of one of its calculated risks - how will it meet the new challenges and change as required? This is a significant long-term risk to shareholders (as is the fact that the exclusive rights to the patented search technology end in 2011, only seven years away), which may be a significant business challenge to overcome.
Many Different Values
One of the most beautiful things about privately held companies is that they can be unique in ways that most corporations give up shortly aftergoing public. Google is a reminder that financial values are not the only ones that can impact decision-making - but also the interests of employees (Google provides free medical care to its staff), customers and society as a whole.
It would be really great if more companies used their public debut as an opportunity to reaffirm their values. We are in a more basic situation in Poland; transparency is still a concern for the public markets, as are issues such as finding a good definition of independence for non-executive directors.
However, Google, by challenging the conventional wisdom of Wall Street, shows that it is possible to be creative and to take risks, succeed and meet high standards of corporate governance.
Regarding the public offering, the founders state that "the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google's past success and that we consider most fundamental for its future."
In fact, the founders go further, showing that they do not trust the public markets, even taking pains to emphasize that they are going public even though they do not need the money, for instance writing that "a management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half-hour."
Strong words, especially coming from one of the most successful technology start-ups ever. It caused me to consider what we can learn from Google and (maybe) apply to public companies in Poland (or other emerging markets).
Candor and running a public company like a private one
Google is almost required to go public. Because of its size, Google would soon need to report by law certain financial information, changing its past practice of keeping business information closely held. Therefore, it appears that the founders have decided to go public but retain as many aspects of the private company that they built as they can.
What appeals to so many readers of this prospectus is its candor in doing this.
So many veterans of Wall Street privately chafe at many of the normal practices of the exchanges. Quarterly thinking (for instance - meeting targets and giving guidance for the next quarter), does not reflect the way the real world works. It also tends to distort the view of success in those companies - as they will tend to organize and work to that quarter. Not every company really needs a short-term discipline to achieve its goals anyway.
Google, as part of its promise not to focus on quarterly results, also promises to report results candidly - even 'lumpy,' if that is how they appear. Of course, this is refreshing, especially after an age of obscure earnings reports based on (and sometimes manipulated by) accounting considerations that are intentionally difficult to decipher.
The founders also promise not to stop taking the risks that have helped Google to grow so large (according to them, 20 percent of their projects will fail). They also will not alter the company's unique corporate structure (it is run by a triumvirate rather than a traditional CEO) just to suit the market.
Google also makes an explicit commitment to corporate ethics. In the 'Don't Be Evil' section of the prospectus, it outlines this commitment in the kind of clear terms not typically found in corporate codes of conduct or mission statements. The Google approach to ethics is clear - and that is what makes it difficult for most corporations to match.
Google is the most important public offering in the last few years. It is also an incredibly successful company, with an operating profit of $340 million (zł.1.3 billion) on sales of $960 million (zł.3.7 billion). If not for these factors, the hubris of the founders might be seen as more than arrogance by detractors. However, because of their success, they are allowed to be bold. I believe that this boldness is good for the public markets - especially out here in emerging markets, where it is all too easy to believe that the formula set out by the wise and efficient 'markets' is the only alternative.
The prospectus of Google reminds many of Berkshire Hathaway, and is in fact inspired by Warren Buffet. Of course, Berkshire Hathaway is one of the best performing stocks of all time - even though its corporate structures are not in keeping with modern governance 'best practices.'
I am also impressed by the plans of the founders to give a part of the shares and profits (one percent) to a non-profit Google Foundation that they are establishing to address issues such as poverty, human rights and the environment. It raises the bar of corporate social responsibility - most of which is self-serving public relations palaver.
Legitimate Concerns
On the other side, there are some issues with the public offering of Google. The main one is that the new shares are going to be issued with significantly diluted voting rights (one tenth of the value of the founders' shares). This promises to keep control of the company with closely held insiders.
The main risk is that this structure works only as long as the company is performing well. If Google falters - especially in the face of what will be increasing competition from other entrants into the search engine market or as the result of one of its calculated risks - how will it meet the new challenges and change as required? This is a significant long-term risk to shareholders (as is the fact that the exclusive rights to the patented search technology end in 2011, only seven years away), which may be a significant business challenge to overcome.
Many Different Values
One of the most beautiful things about privately held companies is that they can be unique in ways that most corporations give up shortly aftergoing public. Google is a reminder that financial values are not the only ones that can impact decision-making - but also the interests of employees (Google provides free medical care to its staff), customers and society as a whole.
It would be really great if more companies used their public debut as an opportunity to reaffirm their values. We are in a more basic situation in Poland; transparency is still a concern for the public markets, as are issues such as finding a good definition of independence for non-executive directors.
However, Google, by challenging the conventional wisdom of Wall Street, shows that it is possible to be creative and to take risks, succeed and meet high standards of corporate governance.
