Summary:

Until now, Dan Loeb could squawk all he wanted about the failures of the Yahoo board but the odds that he could force real change were slim. Now there’s a chance he could get new CEO Scott Thompson fired.

Dartboard; one dart on bull's eye while three darts are off-target
photo: Corbis / Chat Roberts

Until now, as the head of Yahoo’s largest institutional shareholder, Dan Loeb could squawk all he wanted about the failures of the board, post plans and rant about the inadequacy of its new CEO but the odds that he could force real change were slim. Now the odds have changed — and Loeb is trying to make the most of it.

Thursday, Loeb, the CEO of hedge fund Third Point, revealed something that should have been caught well before now: CEO Scott Thompson doesn’t have the education credentials that were listed in his bio and included in Yahoo SEC filings. Thompson did graduate from Stonehill College but his degree was in accounting — not accounting and computer science. The school didn’t have a computer science department when he was there. Yahoo’s response confirmed the inaccuracy, calling it an “inadvertent error” and promising a probe into that, as well as another Loeb assertion that director Patti Hart was claiming a degree she didn’t have.

Now Loeb is demanding that Thompson be fired for cause by Monday and that Hart resign. He also wants to be added to the board along with his full slate, which includes Jeff Zucker, Michael Wolf and Harry Wilson. Given the board’s resistance to anything like that so far, he could end up forcing the resignations and still not getting on the board.

It doesn’t help Thompson’s case that audio of an interview has surfaced where he had the chance to correct the computer science error and instead stuck to it and called himself an “engineer.”

What can Loeb do?

Holding 5.8 percent of the stock gives him a voice but he doesn’t own enough to force action. What he can do is make life more miserable for Thompson and the board while he tries to gain more voting power.

As for Thompson, he may be able to ride this out but the past history makes that more difficult.

Either way, it’s an energy drain that Yahoo doesn’t need.

Loeb’s latest broadside:

May 4, 2012
Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Board of Directors:

Yahoo!’s initial response yesterday to Third Point’s identification of material inaccuracies in both CEO Scott Thompson’s and Director Patti Hart’s educational record was insulting to shareholders. We assume that these initial statements were attributable to Mr. Thompson and were not made with the Board’s approval. While we appreciate the Board’s statement late last night that it would conduct an investigation, unfortunately, for this Board and this Company, it is too little and months too late.

To assert that years of inaccurate SEC filings, website biographies and, most likely, D&O questionnaires and curriculum vitae (including, presumably, the CV provided to Yahoo! when Mr. Thompson reached out for the job) were “inadvertent” is, in our view, the height of arrogance. Mr. Thompson and the Board should make no mistake: this is a big deal. CEO’s have been terminated for less at other companies. The Company’s Preliminary Proxy Statement filed on April 27, 2012 (at page 22) states that the “minimum qualification for service as a director of the Company are that a nominee possess. . . an impeccable reputation of integrity and competence in his or her personal and professional activities.”

Furthermore, Yahoo!’s response “confirming” that Ms. Hart “specialized” in Marketing and Economics, rather than having earned her degree in such subjects (as Ms. Hart has asserted in filings for years) is a similar canard. A “specialty” is not a major. It is not a “minor”. We don’t know what it is, but we do know that like Mr. Thompson, Ms. Hart has been misrepresenting her actual degree to the investing public for years. Again, we hope that the Board does not accept this feeble attempt at “spin” as a justification for Ms. Hart’s misrepresentations.

Irreparable damage to Yahoo!’s culture will continue every day that the Board allows Mr. Thompson and Ms. Hart to remain at the helm of the Company after having clearly demonstrated that they lack even the “minimum qualifications for service as a director of the Company.” Mr. Thompson, in particular, cannot possibly have any credibility remaining with the all-important Yahoo! engineers, many of which earned real – not invented – degrees in computer science. Moreover, permitting Mr. Thompson and Ms. Hart to stay with the Company after apparently violating the Code of Ethics sends a message to all Yahoo! employees that a different set of rules applies at the top.

Third Point, Yahoo!’s largest outside shareholder with over $1 billion invested, called yesterday for an immediate investigation if our assertions were true. The Board appears to have acceded to this demand. Its response must be swift and decisive. In that regard, Third Point will consider it grounds for further action if the Board does not take the following steps by Noon EDT on Monday, May 7th:

1) Publicly reveal the process by which it vetted Mr. Thompson as a potential CEO candidate. This disclosure should include the release of all minutes of any meeting at which Mr. Thompson’s candidacy was discussed and any reports or other materials upon which directors relied to evaluate Mr. Thompson’s candidacy.

2) Disclose whether any Board member, including Maynard Webb, who has long-standing ties to Mr. Thompson, and Ms. Hart, who headed the Search Committee, was aware of Mr. Thompson’s deception prior to receipt of Third Point’s letter yesterday.

3) Provide shareholders with all information regarding the director nomination process, including the so-called “skills matrix” referred to in the Company’s preliminary proxy statement, which the Board purportedly used to determine the qualifications of various candidates, including Third Point’s nominees.

4) Terminate Mr. Thompson for cause immediately given his demonstrable unsuitability to remain Chief Executive Officer and a director of Yahoo! and accept the resignation of Ms. Hart for similar reasons.

Finally, we urge the Board to stop wasting valuable company resources and drop its resistance to placing the Third Point nominees on the Board. We are prepared to join immediately. Once on the Board, our first tasks will be to work with the remaining Board members to find Yahoo! a new leader with the qualifications and integrity to lead the Company and install best practices of corporate governance. The Company can ill afford to continue this misguided fight with its largest outside shareholder while it has so many other fires to put out. There has been enough damage already.

Sincerely,
Daniel S. Loeb
Chief Executive Officer
Third Point LLC

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