SoftBank Investors Call for Internal Probe of No. 2 Arora

SoftBank Investors Call for Internal Probe of No. 2 Arora
  • Shareholders sent letters to board of SoftBank, Sprint unit
  • SoftBank says Arora has done nothing wrong, no new information

A group of investors in SoftBank Group Corp. has called on the board to investigate and possibly dismiss Nikesh Arora, the company’s second in command, in a sharply critical, 11-page letter that questioned his track record and qualifications as president and heir apparent to billionaire founder Masayoshi Son.

The request came in a letter to SoftBank’s board dated Jan. 20 from the American law firm Boies Schiller & Flexner and signed by Matthew Schwartz, a partner at the elite New York firm, without identifying the shareholders or how much stock they own. 

The critique of Arora, which hasn’t been made public, questions whether the executive has conflicts of interest due to his existing role as a senior adviser to the private equity firm Silver Lake. It also suggests he may have been involved in past wrongdoing and generally poor business decisions. A separate letter from one investor to the board of Sprint Corp., which SoftBank controls, asks for his removal as a director there for similar reasons.

In addition to these allegations, the investors criticized Arora’s allegedly "poor investment performance and a series of questionable transactions" during his tenure. "Despite these issues, the SoftBank board saw fit to make Mr. Arora the third-highest paid executive in the world without any track record of accomplishment at the company," wrote Schwartz.

The investors are demanding that the boards at SoftBank and Sprint conduct "an internal investigation" by an independent firm. “We believe that an independent investigation will establish compelling grounds for the boards of SoftBank and Sprint to dismiss Mr. Arora from his executive and board positions.”

SoftBank denied that Arora has done anything wrong and called the letter “unsubstantiated allegations” from “unidentified shareholders.” The Tokyo-based company said it vets any potential conflicts in Arora’s investment decisions and has complete confidence in his management. It said the board is in the process of reviewing the letter. “I have complete trust in Nikesh and one thousand percent confidence in him and know he will continue to do great things for SoftBank in the future,” Son said in a statement. Sprint declined to comment.

Arora said he has worked hard to help SoftBank since joining the company from Google Inc. and has been careful to share any information that would present a potential conflict. “I think my track record speaks for itself,” he said. “Since my time at SoftBank, the last 18 months, I always strived to put the company first and I think none of the comments have any substantive bearing in fact.” He also said he may end the advisory role at Silver Lake when his current contract expires.

The investors are targeting one of the most successful executives in Silicon Valley. The 48-year-old is considered a star at SoftBank. At Google, Arora worked for a decade at the search giant, rising to become the top sales executive and later chief business officer. He joined SoftBank in 2014 and was promoted to president about a year later. Son, 58, called Arora the most likely candidate to succeed him. 

Arora has also made an enormous personal bet on the future of SoftBank. Last August, he said he would buy 60 billion yen of the company’s shares, worth $483 million at the time. That was the largest insider purchase by an executive in Japan for at least 12 years.

“Picking on Nikesh’s performance seems entirely arbitrary,” said Atul Goyal, an analyst at Jefferies Group. “I’m inclined to trust Masa’s judgment and Nikesh has already shown his commitment with the share purchase.”

SoftBank’s shares were hit last year by struggles at Sprint and Alibaba Group Holding Ltd., its two most valuable holdings. The stock has bounced back almost 40 percent since Feb. 15, when SoftBank said that it would repurchase as much as 500 billion yen of its own shares. SoftBank’s stock is down about 20 percent since Arora joined the company.

SoftBank shares fell as much as 5 percent Thursday after the letter was disclosed, before closing 1.4 percent higher at 6,088 yen. Shares of Sprint slipped 3.2 percent to $3.68 at the close in New York.

Swiss Investor

One of the investors challenging Arora is Nicolas Giannakopoulos, a 46-year-old Swiss national. He said that his firm holds a bit more than $100,000 of shares of SoftBank and Sprint. Giannakopoulos said he is offended by Arora’s ethics and a history of deal-making he views as self-serving. “This is a kind of person, a kind of manager, who has no place in this world,” said Giannakopoulos.

He would not comment on the identity of any other investors, how broad the investor group is or how many shares they own. He said he is paying part of the fees for the services of Boies Schiller, whose name partner, David Boies, led the U.S. Justice Department’s antitrust case against Microsoft Corp. and Al Gore’s Supreme Court case over the 2000 presidential election results. Other investors are paying their share of the legal fees, Giannakopoulos said.

Schwartz, the Boies Schiller attorney, said that SoftBank has not responded to his letter. “We are actively considering our next steps,” he said. The letter says that if the boards of SoftBank and Sprint do not announce an investigation within 60 days the investors intend to pursue other remedies, including potential legal action and giving information to government regulators. The 60-day period ended last month.

The letter alleges three broad areas of concern: conflicts of interest that suggest Arora may put his personal interests ahead of those of SoftBank; poor performance in making investments for SoftBank; and excessive compensation at the company without sufficient disclosure.

The conflict-of-interest allegations center on Arora’s role as a senior adviser at Silver Lake, a position he has held since 2007 when he worked at Google. The letter contends that Arora is getting compensated by the firm for helping with potential technology company investments that are similar to the investments he is supposed to be making for SoftBank. “This dual role has the potential to reward Silver Lake to the detriment of SoftBank,” Schwartz wrote.

Silver Lake

SoftBank said that it is aware of Arora’s involvement with Silver Lake and takes care to thoroughly vet any potential conflicts. If investments present potential problems, they are examined by top executives, including Son. The company said it is comfortable with Arora’s position as a Silver Lake adviser and that SoftBank benefits from his involvement there.  A spokeswoman for Silver Lake declined to comment.

Arora said that his involvement with Silver Lake has been minimal since he joined SoftBank and that any information he gets from the firm is limited to only what he needs to know for specific potential investments. He estimates that he has spent a total of 10 to 20 hours on the position in the last year.

The investor letter contends that Arora’s investment track record has been “lackluster” with a lack of proper due diligence. It cites two specific deals: SoftBank’s investment in an online video site called DramaFever and another investment in an Indian real estate portal named Housing.com. In both cases, the startups ran into trouble shortly after SoftBank put in money, according to the letter.

SoftBank said the business of backing startups, which Arora leads at the company, is by nature high risk and that failures are to be expected. Picking two deals that have had trouble says little about the overall rate of success, it said. The company said it is satisfied with Arora’s strategy and that other startups he has backed, including India’s Snapdeal, have thrived.

“It is entirely premature to evaluate an investment track record after 18 months; SoftBank is a long term investor,” said Paul Kranhold, a spokesman for SoftBank.

Arora also said it is too early to judge how his team’s portfolio of investments will do. In cases where startups have run into challenges, he said he has taken swift action to address them and then move forward.

The third area of concern cited in the letter is Arora’s compensation. In June, the company said it paid him 16.6 billion yen for the seven months of the previous fiscal year that he had worked, the highest pay package on record in Japan at the time. The letter called that “alarming and intolerable” given that shareholders have seen no benefit yet from his joining SoftBank.

SoftBank said Arora’s compensation was reasonable given his skills and experience. It also said that part of his pay was a signing bonus. It is common for executives changing companies to be compensated for stock options from their old companies that they will forgo. Arora held unvested Google stock options and other securities worth more than $76 million at the end of 2013, according to the last proxy statement before his departure.

“Without hard evidence, this will probably be dismissed by the analyst and investor community as groundless,” said Goyal of the letter. “Jury is still out, but perhaps Masa Son made the right decision with Arora.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE