Let me try to white-board this transaction for you. Executive at BigCo has a girlfriend with a start-up company. Executive makes loan to Start-Up in the amount of $2.6 million. Then, Start-Up seeks outside investors for Series A financing. BigCo invests $3.9 million in the financing round, and Start-Up repays Executive's $2.6 million loan. Executive and girlfriend marry the same month. The total amount of the Series A financing is undisclosed, but we know that a company controlled by another BigCo director is an investor.
Does this sound like another Andy Fastow transaction, maybe Project Princess Leia? It's obviously not as brazen or large-scale. Is it another example of Jeff Skilling investing $180,000 of his own money in his girlfriend's company, Photofete, while the company was a vendor to Enron -- a transaction jurors later said was particularly damning to Skilling's character?
Nope. This is our beloved Google, and the tale of Sergey Brin and his new wife, Anne Wojcicki. Wojcicki's start-up is called 23andMe. NYT article here. The company's sparse website gives very little information about what the company will actually do, but it does say they are hiring and one fringe benefit is complimentary beverages and honey roasted peanuts. The website's one paragraph on its business plan states that the company will help clients take ownership of their genetic information and seems to promise to help clients map their own genomes. The website lists three people in the "about us" section: Wojcicki, another co-founder and a director. All three have experience in health care industry sales, analysis and investing.
Google does invest in start-ups. (Google was very public about its goal to invest in market-based socially responsible projects, but this doesn't seem to fall into that category.) The outside investment part is not unusual. But why this start-up? Obviously, Brin picked a great start-up once, and maybe 23andMe is the next Google. Could be. But doesn't it raise more concerns than necessary? Brin has his own $14 billion to invest in projects. Why not just invest personally? If he believes in the upside of Wojcicki's company so much, why isn't he on the equity side instead of the debt side that just got repaid? Does having Google as an angel investor give 23andM3 some cachet? Even though it's public knowledge that the head of one is married to the head of the other? In today's culture of seeing scandal where none exists, this corporate investment seems to be unnecessary.
Here is Google's Code of Conduct, which includes a section on "Conflicts of Interest." Although the section begins with this "avoid conflicts" language
A conflict of interest occurs when, because of your role at Google, you are in a position to influence a decision or situation that may result in personal gain for you or your friends or family at the expense of the company or our users. All of us at Google should avoid situations that present actual or apparent conflicts of interest; it is our responsibility to act at all times with the best interests of Google and our users in mind. In no way should you personally profit from transactions based on your relationship with Google if it harms the company.
this admonition seems to be clearly waivable by a superior:
Similarly, business relationships with friends and relatives whose interests may conflict with Google's can easily leave you with the sort of conflict of interest that can be difficult to resolve happily. Our rule here is simple: you should not enter into a Google-related business relationship with a close relative, friend or significant other, or a business they manage or control, without first contacting our Chief Compliance Officer or General Counsel.
Obviously, the code is written for management employees who have the ability to steer work to vendors, etc. not for top management who have the ability to steer Google capital to outside investment opportunities -- or to repay loans to oneself with Google capital. According to Google's 8K, probably required under SOX because of the waiver of the Code of Ethics for a senior officer, the transaction was approved by the directors after the Audit Committee received an evaluation of 23andMe. So the transaction was duly approved and duly disclosed. Let's hope that's enough these days.
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1. Posted by Sarah on May 23, 2007 @ 9:17 | Permalink
If I recall correctly, the bottom line with Photofete went to credibility, not to the underlying investment. Skilling didn't follow disclosure rules, and he lied about various aspects of the money, his relationship, etc. at various times, including to the SEC and while on the stand. I don't think jurors thought Photofete was so important just because Enron did business with Skilling's girlfriend; obviously Skilling wouldn't have gone to jail for that. It was important because Skilling's repeated lies about it--including lies while he was under oath--dramatically revealed something to the jurors about Skilling's character.
(Brin's actions seems quite unlike Fastow's transactions; Fastow took advantage of personal relationships to avoid financial regulations, and he stole money from Enron. It's not a matter of scale; it's a matter of kind.)
Also, just to be clear, I'm not saying that what Brin did was right (though I also think characterizing what happened as his using Google funds to repay a personal loan isn't really fair). I'm also not saying it was right that Skilling was prosecuted. I'm simply trying to make the point that the issues related to the Enron prosecutions are complicated and varied. (For example, one might believe that Fastow absolutely should have gone to jail, but that Skilling shouldn't have.) Comparing them to a caricatured version of a properly disclosed investment by a company in a related party's start-up isn't necessarily moving the discussion forward.
2. Posted by GC on May 23, 2007 @ 9:25 | Permalink
I disagree. This is sleazy and sends the wrong message to everyone else at Google - the message being that even if you are one of the richest people in the world, it's ok to use company funds to help your spouse. Does anyone really believe that the GC, compliance officer and Board were likely to say no to one of the co-founders (who has undoubtedly made each of them fabulously wealthy as well)? Sure they papered up their decision well, and disclosed it (kudos for that), but it's still wrong. Corporate culture, good or bad, starts at the top (see Enron), and this is bad.
3. Posted by Eric Goldman on May 23, 2007 @ 9:53 | Permalink
Even if there was full disclosure and full recusal, this deal made me scratch my head for the reasons you articulate so well. I'm having a hard time contemplating a situation where I would feel comfortable making the same choices. Eric.
PS. $3.9M buys a lot of honey roasted peanuts!
4. Posted by Jeff Lipshaw on May 23, 2007 @ 13:49 | Permalink
The old practitioner in me says this is a very subtle call, and I commented to that effect over at LPB
5. Posted by Christine on May 23, 2007 @ 14:10 | Permalink
Jeff, in your post you seem to say that if Brin had not brought the investment opportunity to Google that he would have been usurping a business opportunity. I don't see that. Brin obviously would be able to say that the opportunity came to him from his connection to his girlfriend/wife, not from his position as an officer/director of Google. NYU seems to own residential properties, but that doesn't mean that an NYU professor, when asked by his brother to purchase his apartment, must take the opportunity to NYU.
6. Posted by Jeff Lipshaw on May 23, 2007 @ 17:07 | Permalink
But that makes it a fact question, doesn't it?
I was just pointing out that there could be a circumstance in which Brin made a personal investment and he really should have brought it to the company.
I'm not sure about the NYU professor analogy, because it's not always clear what fiduciary obligations a professor has to the university. But if the professor were working in a lab, and was presented a business opportunity because of his familiarity with the lab's technology, it would be a closer call than the apartment example. And if the opportunity was presented by the prof's brother, then you'd have the fact question: does the opportunity exist because of your knowledge/position with NYU or because it came to you from your brother?
7. Posted by Peter on May 23, 2007 @ 18:58 | Permalink
The 8-K was not filed due to the conflict waiver. It was filed under 7.01 FD Disclosure either because Google disclosed it voluntarily in this manner or it was forced to make this disclosure due to an inadvertent disclosure to an outsider. Although the materiality is questionable, so I'm not sure Google had to disclose this at all and it appears to have done so out of the goodness of their hearts hopefully in the name of transparency (though it would have had to disclose it later in their proxy statement).
All that being said, I do like their dog policy set forth just above their conflicts policy:
e. Our Dog Policy
Google's respect and affection for our canine friends is an integral facet of our corporate culture.
We have nothing against cats, per se, but we're a dog company, so as a general rule we feel cats visiting our campus would be fairly stressed out.
8. Posted by Jake on May 23, 2007 @ 20:24 | Permalink
No quarrel with Christine's analysis. Brin seems rather reckless. Google investors take heart.
9. Posted by M. Hodak on May 23, 2007 @ 20:44 | Permalink
Between this and foregoing a dutch auction on their second round financing in favor of the traditional IB route, I think Google's founders have gone corporate on us. Everyone capitulates to The Man, or they become The Man. Or they teach.
10. Posted by Steve Diamond on May 24, 2007 @ 2:05 | Permalink
Can anyone say "Paul Wolfowitz"?