Goosebumps in Silicon Valley
from
September/October 2002
by David Lipschultz
As Congress, the Securities and Exchange Commission, and
shareholder lawsuits jockey to stamp out egregious conflicts of
interest in companies ranging from Merrill Lynch to Enron, many
directors and executives at large technology companies are getting
chills. What are they scared of? Their membership on technology
advisory boards.
TABs, as they're called, are typically panels of high-level engineers, CTOs, CIOs, and other executives from major tech and telecommunications outfits who advise start-ups on how to navigate the technology landscape. Sounds innocent enough, but corporate watchdogs argue that a TAB's real purpose is often to bribe executives who can purchase the start-up's products. According to BoardSeat, a San Francisco-based consulting and research firm specializing in corporate governance, two-thirds of all start-ups have TABs—and 86% of the TABs pay their members with shares in the start-ups. During the heyday of IPOs and huge buyouts, Fortune reported that various executives at telecommunications carriers made most of their eight-figure wealth by serving on TABs. "That's why a running joke in the valley says that if you sit on one, you're considered to be 'on the TAB,'" says a venture capitalist and board member who requested anonymity.
Clearly, if executives are raking in the lion's share of their incomes from start-ups they don't work for, you have to question where their allegiance falls. Will they buy a start-up's product, even if it's not the best on the market, because a single multimillion-dollar purchase from a major vendor will catapult the value of the start-up's shares? Or will they buy more of the product than their companies need in order to help prop up the start-up's revenues?
A former director of Internet engineering at the WorldCom-owned Internet hardware company UUNet—and a man so spooked by the emerging scrutiny of TABs that he too insisted on anonymity—says he saw firsthand just over a year ago how one broadband company, now defunct, suffered because of an employee who served on a TAB. "They had 25% more equipment than they needed sitting around a warehouse," he says. His due diligence found that the person in charge of purchasing was on the TAB of the supplier. "As someone who has sat on various TABs, it was obvious to me what had happened," the ex-director says.
"There is definitely an overriding sense of paranoia about TABs after Enron," acknowledges the venture capitalist, who has served on a number of corporate boards. "TABs were once a badge of honor, put front and center on a company's website. Now they're mysteriously off the site, and you can't seem to find out who's on what TAB anywhere."
Most of the major telecom companies, whose technology executives are highly sought-after as TAB members, are introducing policies to forestall conflicts of interest. WorldCom requires its employees to give notice of any TAB relationship so that it can safeguard against illicit temptations. "Before I left the company, I heard that the directors were starting to get a little scared and had asked some execs to give back their TAB shares," says the former UUNet director. WorldCom declined comment, perhaps because it has other worries.
Says the venture capitalist: "Now more than ever, the tech industry doesn't want itself under a microscope. And TABs are clearly one of the more glaring conflicts of interest in the business."
Another bubble burst.
