In the Undoing of a C.E.O., a Puzzle – Yahoo
By JAMES B. STEWART

When the activist shareholder Daniel Loeb confronted Yahoo’s directors on May 3 with the possibility that Yahoo’s recently hired chief executive, Scott Thompson, might have falsified his résumé by claiming to have a computer science degree, their initial reaction was disbelief. “Scott is a forthright, no-nonsense, straightforward personality and a likable guy,” one director said.

But just 11 days later, Mr. Thompson’s credibility with the board was in shreds, Mr. Loeb and two of his allies had landed the board seats he’d been agitating for since starting a proxy fight earlier this year, and Mr. Thompson was out, despite his last-minute revelation that he was battling thyroid cancer.

Interviews this week with people involved in the fast-moving events and the board’s decisions reveal how what at first seemed a small and improbable allegation from an annoying dissident shareholder turned into a major crisis, thanks largely to Mr. Thompson’s own evasions and missteps. In the end, the board had little choice but to sever ties with its chief executive of only five months and largely give Mr. Loeb what he wanted. (Mr. Thompson didn’t respond to a message seeking comment, and hasn’t made any public statement since leaving Yahoo. His lawyer declined to comment.)

“This went to the basics of corporate governance,” a director at the time told me. “The situation was spinning out of control. We had to put our individual interests aside and give the company a chance to survive and regain its footing.” (Like others interviewed, he asked not to be named since the events remain under investigation by a board committee and outside lawyers. Shareholder suits are likely.)

The crisis couldn’t have come at a worse time for Yahoo, an Internet pioneer and owner of what was once the world’s most visited Web site. Yahoo rejected a lucrative takeover bid from Microsoft in 2008, has struggled under intense competition from Google and Facebook, and has been dogged by management turmoil that it had hoped to end by hiring Mr. Thompson. “This was causing incredible turmoil and making the company even more fragile than it was,” the director said.

After getting Mr. Loeb’s incendiary letter, which said Mr. Thompson had graduated from Stonehill College in Massachusetts with an accounting degree, and the college didn’t even offer a computer science major at the time, the board appointed a three-member committee to investigate. The departing board chairman, Roy Bostock, who had said he would be stepping down in July, was delegated to meet with Mr. Thompson.

The board’s initial hopes that it was all an easily explained mistake were quickly dashed. Instead of offering Mr. Bostock an explanation, Mr. Thompson fumed at Mr. Loeb and his tactics. Mr. Bostock stressed that the only way to deal with the situation was to “immediately tell the absolute and total truth, whatever it is” and make it public, according to a person with knowledge of the conversation. Unspoken but implicit was the understanding that if he’d ever misstated his credentials, Mr. Thompson should publicly admit it, apologize and offer to resign. In that case, the board would have assessed the situation, but might well have stood behind him. Mr. Thompson seemed to get the message, but said nothing more to clear up the matter.

Almost immediately, directors began getting calls from some of Yahoo’s top employees and managers. Saying one’s major was computer science rather than just accounting might seem a minor discrepancy to some people, but not in Silicon Valley where Yahoo has its headquarters and where thousands of engineers live and work. “It was a very emotional situation for employees,” one person involved said. “They were saying, ‘How can I work for a company that has a C.E.O. who claims to be a computer scientist when he’s not? I can’t work here if that’s true.’ “

Mr. Thompson began seeking pledges of support from some board members and executives without offering any further information, which bothered some board members. When a top manager, one of the people directly reporting to Mr. Thompson, said he couldn’t provide such support, Mr. Thompson told him not to reveal their conversation (the employee did tell co-workers, some of whom reported it to the board.) “Scott was trying to rustle up support, and when he didn’t get it, he tried to silence people,” a board member said. “This went straight to the trust issue.”

Then a radio interview surfaced in a report by Kara Swisher, co-executive editor of All Things D, in which the host of an NPR program, Moira Gunn, asked Mr. Thompson point blank about his degree in “accounting and computer science.” Board members listened to the recording. Not only didn’t Mr. Thompson correct the statement that he had two majors, he added, “That’s really the background that I have, and it started back in my college days, and I think that’s really the wonderful part of being an engineer is you think that way.”

Nonetheless the next day, at a meeting with Yahoo employees, he blamed the search firm responsible for placing him as president of PayPal, owned by eBay, in 2000, board members were told and read in media reports. He didn’t name the firm, but it was no secret it was Heidrick & Struggles, which promptly issued a statement. “Based on information in our possession, this allegation is verifiably not true and we have notified Yahoo to that effect,” it said.

“That was the final straw,” a Yahoo board member said. “We never got this confirmed, but I presumed he had given them a statement or résumé that contained the false degree.”

After a stream of phone calls that day reached a consensus that the company was in an untenable situation and that Mr. Thompson had to go, the Yahoo board met for three hours the next day, Friday. About an hour into the meeting, Brad Smith, a board member and Intuit’s chief executive, who was probably Mr. Thompson’s closest friend on the board, received a text from Mr. Thompson asking him to step out and take a call.

When Mr. Smith returned, he reported, “It seems like Scott has decided to part ways with the company,” according to those present. Mr. Thompson told Mr. Smith that he’d had surgery for thyroid cancer several weeks earlier. (Board members were aware that he’d had what he described at the time as minor surgery, but not that it was for thyroid cancer.) Mr. Thompson added that because he was still getting up to speed at Yahoo, he’d waited longer than he should have for the surgery, and as a result, he had to take medication that might affect his performance over the next month or so and he might be groggy at times. “It was not a formal resignation,” a board member said, “just a conversation where he said he’d come to this conclusion.”

The news prompted a long conversation among board members. Was this giving the board a graceful exit from a difficult situation — or was it a ploy for sympathy? “You can come to your own conclusion,” a board member said. Board members had been inclined to terminate Mr. Thompson “for cause,” which meant he’d receive no severance and wouldn’t be entitled to stock grants totaling $16 million. At the same time, they didn’t want to be unduly harsh. Advised by their counsel, Ron Olson, of the Los Angeles firm Munger, Tolles & Olson, they concluded Mr. Thompson’s medical situation should have no bearing on the terms of his departure. To replace him, they settled on Ross Levinsohn, 48, who ran Yahoo’s Web sites, as interim chief executive.

At Mr. Bostock’s urging, they also resolved to end the battle with Mr. Loeb. Before the revelation about Mr. Thompson, they thought they could win the proxy contest. But a critical element was management stability and a strong chief executive. Those had now been abruptly removed. They’d offer Mr. Loeb and two of his allies three of the board’s 12 seats (rather than the four Mr. Loeb wanted), and Mr. Bostock and other directors would leave immediately rather than wait until July.

After sleeping on their decisions, the board formally voted the next morning. Lawyers were dispatched to negotiate the deal with Mr. Loeb. Mr. Smith and another director, Maynard Webb, met with Mr. Thompson, who seemed resigned to the outcome and spoke mostly about his ongoing medical treatments. Others who spoke to him said he didn’t mention the résumé issue and his subsequent explanations, and seemed in denial that his credibility — and not his treatment for cancer — had precipitated his departure. “He did say that he was sorry he hadn’t been able to meet the board’s expectations,” said one person who talked to him. “I took that as an oblique apology, and I wished him well.” Others were much more angry. Yahoo’s news release said only that Mr. Thompson had “left the company.”

Mr. Thompson now joins a lengthy and puzzling list of prominent people who have embroidered or falsified their résumés and were felled for doing so, including a former Notre Dame football coach, chief executives of RadioShack and Bausch & Lomb, a director of the Federal Emergency Management Agency and an MIT admissions director.

While the Yahoo matter remains under investigation, how and why Mr. Thompson’s résumé came to reflect the false claim that he had a degree in computer science remains a mystery. If the company wants to solve it, Yahoo may need to add a psychologist to its investigative team.