Why Amazon's Board Is Part of the Problem

Its directors, led by Jeff Bezos, are staying mum instead of offering solutions and shaking things up. Will shareholders demand action?

By Stefani Eads

What, Jeff Bezos worry? As Amazon.com's (AMZN ) stock has sunk from $75 to $10 per share over the past year and losses and debts have soared into the billions, the smiling e-commerce maestro has remained largely unscathed. In fact, the charismatic Bezos continues to reassure investors and his board of directors that all's well that ends well.

But a happy ending to Amazon's swoon is far from certain. Several lawsuits have been filed in the last month, alleging that the e-tailer distributed false and misleading information to investors. On top of that, the New York Society of Security Analysts, a nonprofit organization that has held several public meetings to interpret Amazon's financials, sent two letters in early March -- and another on Mar. 30 specifically to board member and venture capital heavyweight John Doerr -- requesting that Amazon's board explain the company's financial situation in clearer language, using traditional accounting methods. The NYSSA also asked for details on what the board is doing to establish contingency plans. Amazon says it received the letters but does not comment on future actions.


  Meanwhile, Amazon's board is facing mounting criticism for apparently never having questioned Bezos on strategy, judgment, or financial matters. More fuel will be poured on that fire when shareholders receive Amazon's 2001 proxy statement during the first week of April, say corporate-governance experts. "People are coming to view Amazon's problems as the result of poor corporate governance rather than the effect of the economy in general," says Pat McGurn, director of corporate programs for Institutional Shareholder Services. "Unfortunately, the board doesn't seem to see governance as part of the solution."

That's no surprise to Amazon skeptics. They say the board is too small, too clubby, and lacks the necessary independence to make serious judgment or interventions in Amazon affairs. They further add that the board is too heavy with venture capitalists who are looking to cash out rather than build long-term shareholder value. And they decry the lack of retail experience on the board.

All of this is complicated by the large ownership stake of Bezos, who holds some 32% of the company's stock. That stake is a serious obstacle to anyone looking to shake up the board. Still, that time may be coming soon if the board doesn't do something to turn around Amazon's flagging fortunes.


 The five-person board is chaired by Bezos, who serves as chairman as well as CEO and president. Others in the group include: Madrona Investment Group director, Tom Alberg; noted Kleiner Perkins Caufield & Byers director and venture capitalist, John Doerr; director and former CEO of Intuit(INTU ), Scott Cook; and former Microsoft (MSFT ) heavyweight and current director of the Bill & Melinda Gates Foundation, Patricia Stonesifer. Alberg and Scott referred all calls for comment on this story to Amazon. Doerr and Stonesifer did not return phone calls.

"The company eschews the most minimal requirement of directors: independence," says a critic

The board certainly has a lot of brainpower. But it remains a tiny body to run a company with thousands of employees and a $4 billion market capitalization. The problem with small boards, experts say, is they don't have the diversity to bring in new ideas or sufficiently varied skill sets. "Five board members is just too small to be effective in Amazon's case," says Roger Raber, CEO of the National Association of Corporate Directors. "An average of 7 to 10 is good, but 5 is more like a secret club."

Size isn't the only thing about Amazon's board that bothers Raber. "The company eschews the most minimal requirement of directors: independence," he adds. That's a tough one to prove, as thoughts on what actually constitutes board independence vary greatly. Traditional standards dictate that a board with an average of 12 directors should have no more than two to three insiders. Insiders are commonly defined as employees, officers, relatives, consultants, service providers, or those who have or may have a compromising economic affiliation with the company. Of course, good corporate governance also recommends that board members all hold a significant equity stake in the company to ensure that their interests are aligned with those of shareholders.


  The difference is subtle. But corporate governance experts are concerned that Amazon is on the wrong side of the line, even if Bezos is the only official insider. The difference? The venture capitalists hold enough short-term interest in the company that their objectivity could be questioned. After all, VCs are programmed to cash out rather than build out. Also, last year's proxy statement revealed that both Doerr and Bezos sit on the board of drugstore.com, one of only a few Amazon investment partners it has not let languish.

"Running a company is not a VC's role. VCs are more concerned with the incubation of new companies in order to get the best return on their investments," McGurn says. "This is the same board Amazon had when it was burning through all that cash. Ultimately, a VC's interest is in cashing out."

McGurn also thinks the board lacks diversity of experience and related industry expertise. A first-time CEO, Bezos is a former hedge-fund manager who brings no retail background to the table. Yet he says he has no plans to replace Joseph Galli, the retail expert and former president who left the company after six months. And on Mar. 19, Amazon also lost its top retail-technology executive, Christopher Payne.

Amazon isn't the only Net company with a board that might be construed as inadequate

Such departures mean the company has big gaps in key executive slots -- slots that Bezos himself seems intent on filling with, you guessed it, Jeff Bezos. That attitude might trouble many corporate boards but not Amazon's, which let both happen without comment. "They all have tunnel vision, and there's no evidence that they're providing Bezos with the kind of introspection he doesn't seem to be able to manage on his own," says McGurn. The result is a board structure and style that may conform too closely to one man's taste -- Bezos'.

To be fair, Amazon is far from the only Internet company with a board that might be construed as inadequate. According to a January, 2001, study by executive recruiter Spencer Stuart, boards of Net companies tend to be less independent, with only 62% of directors meeting a clear definition of independent. That compares with 78% of the boards of S&P 500 companies. Net boards are also smaller, averaging 7 directors, vs. 12 for their S&P counterparts.


 What's more, Net company boards tend to form fewer committees -- two less on average -- indicating a lack of expertise. And, according to the study, board diversity is waning at Net outfits as more and more directors come from financial-services backgrounds. "The narrow industry orientation of Internet boards is actually growing more entrenched," writes Spencer Stuart's Julie Daum, in a report on Internet companies' board practices. "[That's] an alarming finding during a period when Internet companies could benefit from the diverse perspectives of directors whose companies have experienced reversals and have strategies to deal with them."

Wall Street isn't blameless here, either. Analysts and big investors failed to question the boards of Internet companies when the market was good -- and they still seem to be relatively sedate in this area. "Institutional shareholders especially looked the other way when it came to governance concerns," says David Drake, managing director of Georgeson & Company, a New York-based proxy solicitation and investor-relations firm.

Compared to some of its peers, Amazon's board has been well-behaved. Take the case of erstwhile e-tailer Pets.com. Shareholder-rights site eRaider.com awarded its first-place award for the worst corporate insult to shareholders in 2000 to Pets.com. It wasn't because the e-tailer burned through $150 million in nine months. Or that it gave out $1.5 million in management bonuses for overseeing the liquidation of assets. What eRaider found most insulting was the explanation by the company's investor-relations director as to why 20 tons of dog food had been donated to Alaskan sled-dog owners after Pets.com was in liquidation proceedings. It was done, he said, to avoid grumpy shareholders who might want the inventory sold instead.


  Unlike the vast majority of struggling Net companies, Amazon has graduated to big-company status. Incorporated since 1994 and public since 1998, it's no longer a startup and should no longer operate in startup mode. The board and Bezos may get their first taste of unfriendly fire from once-adoring investors at the annual meeting in May. With 62% of the company held by insiders, shareholders will have their work cut out for them if they want to mount a hostile revolt.

But those insiders -- and especially the board -- should listen to the growing chorus of complaints. At this point, with Amazon's stock sliding lower and lower, everyone's interests are perfectly aligned both inside and outside the company. It's high time for the board to start holding Bezos more accountable.

BW Online Correspondent Eads covers Amazon.com from New York

Edited by Alex Salkever