Yahoo CEO controversy provides investor warning for start-ups

The controversy surrounding former Yahoo chief Scott Thompson highlights investors’ low tolerance for dishonesty, start-ups have been warned.

Domenic Carosa, chairman of Future Capital Development Fund, says investors expect honesty “first and foremost” from the companies they invest in.

“That is paramount in any relationship. If someone is going to communicate a number of mistruths, that puts into question the integrity of that particular individual,” Carosa says.

“Investors have a very low tolerance for dishonesty.”

Similarly, Steve Torso, managing director of Wholesale Investors, says investors value transparency from the chief executives of the companies they invest in.

“Any investor, particularly when they’re investing into private companies, wants transparency when things are going well and when the company is having a difficult time,” Torso says.

“There are always going to be ups and downs as companies go through the start-up phase.”

“Larger shareholders are not looking to point fingers but more to assist the CEOs because they’ve been down that path themselves.”

The comments come after Scott Thompson stepped down from Yahoo following revelations he lied on his resume about having a computer science degree.

Thompson, the former head of PayPal, was appointed chief executive of Yahoo in January, charged with the task of reviving the embattled company.

Thompson took the helm as Yahoo’s fourth chief executive in less than five years, with board chairman Roy Bostock highlighting his high hopes for Thompson.

“I am enthusiastic about the appointment of Scott Thompson as chief executive officer and his ability… to guide Yahoo into an exciting and successful future,” Bostock said at the time.

But Bostock’s hopes have been shattered following the revelations about Thompson’s resume discrepancy.

Thompson has been replaced by Ross Levinsohn, Yahoo’s head of global media, while Fred Amoroso will replace Bostock, who has stepped down from his role as non-executive chairman.

Amoroso, a member of the board, led the investigation into accuracies on Thompson’s resume. But it was Third Point – a hedge fund with a 6% stake in Yahoo – that pushed for the changes.

Third Point chief executive Dan Loeb and two of his nominees will join Yahoo’s board.

James Post, a management professor at Boston University, told The Australian Thompson’s discrepancy might have been more forgivable at a firm that was making money for shareholders.

“Yahoo has been embattled for such a long time that there are a lot of people prepared to believe the worst about that company,” Post said.

“When you’re angry at the management and the board… and you’re losing money, it’s understandable that shareholders would adopt an ‘off with their head’ attitude.”

According to Carosa, there are ways in which start-up chief executives can underline their integrity to investors.

“Reputations take years to build and seconds to destroy. There’s no quick fix for building a reputation. It comes from a lot of hard work,” he says.

“What I recommend to start-ups, whose CEOs may not have a track record, is to surround themselves with people – directors or an advisory board – who have been there and done it before.”

“That adds an element of credibility. That would be my advice to start-ups.”