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Do Unto Others

Even Dartmouth trustees who endorse the Board-packing plan don’t like it when it happens to them.

john_donahoe.pngJohn Donahoe, Class of 1982, an appointed trustee of Dartmouth College, and the exceedingly capable CEO of eBay, has found himself in a dust-up with Internet startup Craigslist, the simplex classified advertising site. As Richard Walters reports in this morning’s Financial Times, eBay’s 28% stake in Craigslist—which by rights ought to give Mr. Donahoe some boardroom influence over how Craigslist is run—is the subject of a brouhaha between Jim Buckmaster, CEO of Craigslist, and Mr. Donahoe.

Mr. Buckmaster wants to deny Mr. Donahoe a chance at suggesting new ideas for the company; the contract formed between eBay and Craigslist says otherwise.

“The battle,” the Financial Times reports, “surfaced in recent weeks with a lawsuit from Ebay, the e-commerce giant which bought a 28 per cent stake in Craigslist in 2004. Ebay accuses Mr Buckmaster and founder Craig Newmark, who control the company, of trying to dilute its stake to reduce its potential influence over the company’s board. […] ‘If someone wanted to come up with a dump truck and give us a lot of cash we wouldn’t say no,’ Mr Buckmaster says. But he adds that he [has] no interest in being answerable to an outside shareholder who would interfere with their unconventional principles.”

In one corner, then, a plainly hidebound company bent on avoiding suggestions from major stakeholders. It’ll take “a lot of cash”—and it’ll expend the cash without oversight; but the company’s executives have no interest in receiving intellectual guidance. No ideas, please—only checks. Indeed, it has engaged in dilutive schemes purposed specifically to curtail the influence of stakeholders. These were enacted at “clandestine meetings,” according to eBay. But, by contract, stakeholders have voting rights which cannot be diluted for nebulous ends like “protecting the long term well-being of the Craigslist community.”

In the other corner, Mr. Donahoe. He is invested in Craigslist. And he takes umbrage at Craigslist’s maneuvering to deny him the voice to which he is contractually entitled. For no reason other than the insulation of a collection of ill-considered standard operating procedures against the force of counterargument, Craigslist’s executives have jiggered the situation so that Mr. Donahoe is shut out of the decision-making process.

Mr. Donahoe and his attorneys make the following allegations, as reported by The Wall Street Journal:

The complaint says that Messrs. Buckmaster and Newmark met as a board on Oct. 15 and Oct. 25 with Craigslist’s outside lawyer, Edward Wes, without notifying eBay. It adds that the two-person board then met and initiated a series of transactions in December 2007 and January 2008 that hurt eBay’s interests as a minority shareholder.

For instance, as an “inducement” to persuade eBay to enter into a new “right of first refusal” agreement, Messrs. Newmark and Buckmaster authorized the issuance of one “reorganization share” in Craigslist for every five shares owned by a shareholder who agrees to the “right of first refusal” agreement, according to the complaint.

Both of the directors, who together own 71% of the company’s shares, immediately agreed to the “right of first refusal” and received “reorganization shares” which diluted eBay’s stake from 28.4% to 24.85% of the outstanding shares.

It sounds like—and it is—an unfair situation; not only unfair, but legally actionable; Mr. Donahoe has brought suit to correct the dilution of his influence; to undo Craigslist’s consolidation of power. Moreover one must confess that the decision by Craigslist executives to shutter outside influence is also bad for the company, which makes it bad for Craigslist shareholders. John Donahoe, understanding all of this, is calling a foul.

The analogy may now be overripe, I confess, but observe that Mr. Donahoe, failing to see the Dartmouth governance fight from the side of the College’s stakeholders, has raised arms on the wrong side. He has taken up with the deaf imperials, supporting a brash Board-packing plan that would destroy 117 years of equal alumni equity in the College, concentrating all oversight power in a five-person governance committee.

We now know that, if Mr. Donahoe were on the other side, he too would arise in protest. At Dartmouth the golden rule, as ever, applies. It is never too late to flash to the side of light.


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