The board and the CEO incentives killed Twitter

I first got interested in Twitter when I read founder, Jack Dorsey’s email of 13 October 2015. This was their first reset and layoff exercise.

Dorsey emailed all staff saying; “Engineering will move much faster with a smaller and nimbler team while remaining the biggest percentage of our workforce. And the rest of the organization will be streamlined in parallel.” Twitter provided those impacted with a generous exit package and help to find new jobs.

Twitter laid off 336 staff from its 4,100 headcount. Hardly significant, right? It was clear to Dorsey something needed to be done to fix the company.?He was going the lead the change.

In the seven years since Twitter has added 3,500 more staff and made little change to the product or business. Why did Dorsey let this happen, remains a mystery? The only change I can see is that in November 2017, they doubled the character count to 280.

In October 2015 the stock was trading at about $30, it fell to a low of $15 in 2016, and in November 2017 was $20. The stock price benefited from the pandemic, rising from April 2020 to a high of $70 in February 2021. It then fell back to the $40 level.?

The leadership team, through their stock grants, certainly did well from the pandemic stock upswing, which hurt lives and livelihoods around the world.

On 28 October 2022, Musk completed the acquisition of Twitter and announced, “the bird is free”. He fired CEO - Parag Agrawal, CFO – Ned Segal and Legal Head – Vijaya Gadde.

More on that later, but he also announced a 50% reduction of the 7,500 headcount at Twitter.

The follow-up email, informed staff to check their emails on 4th November, to find out if they were being let go. A very odd way of communicating, different to Dorsey, but then Twitter was letting go of 10x more people. And Musk is not Dorsey.?

For myself who is passionate about #entrepreneurial management, these developments provide important learnings.

How is company culture impacted by the founders?

Whose interests do boards and corporate leaders really represent?

Was Musk wrong to fire the leadership team “with cause”?

Not at all. He did the right thing by firing the leadership team. Agrawal was known to be a close confidant of Dorsey and was initially brought in as Chief Technology Officer in 2017. Then in a rushed appointment, Dorsey stepped down in November 2021, 11 months ago and Agarwal was appointed CEO.

Agrawal met Musk for dinner on 31st March. This was after Twitter found out that Musk had accumulated 9.2% of the company, making him the largest shareholder. [Musk started acquiring shares on 31st January 2022, and eventually spent about $2.6 billion, or $36 per share.]

A week later, on 5th April, Twitter decides to appoint Musk to the Board. Agrawal said, “We also believed that having Elon as a fiduciary of the company where he, like all board members, has to act in the best interests of the company and all our shareholders was the best path forward.”

Really?

On 11th April Musk declined the offer and, on 14th April, announces a $44 billion acquisition of Twitter at $54 per share.

On 15th April Twitter board announces a “poison pill” to prevent the acquisition. And don’t miss this, the board approves “severance fees” of $122 million to Agrawal, Segal and Gadde.

Why, if the stated remit of the board was to “act in the best interests of the company” would you reward a leadership team that failed to perform?

?Agrawal base annual salary was $1 million, Gadde $0.6 million. Both had stock options.

This leadership team, under the watch of Dorsey, starting from 2015 had been trying to remake Twitter. The headcount expanded to 7,500 and yet the company was floundering. Musk commented there are “10 people managing every single person who is coding”.

Different to Dorsey, Musk focuses on execution, something Srikrishna Vadrevu and I cover in our book.

That aside, Musk pointed out on 9th April that the top 10 Twitter accounts, led by; #BarrackObama and #JustinBieber rarely post and share very little content. Have a look yourself, he is right.

On 25th April the board, having rewarded the failed leadership team, voted to accept Musk’s offer. Musk then tries to get out of the deal and Twitter takes him to court to force the acquisition. This happens on 27th October, and Musk takes over.

Crazy right? The board fights the acquisition, rewards the leadership with a $122 million payout, and then goes after Musk to complete the deal.

What of the incentive offered to Agrawal and the leadership team?

For Agrawal, should he continue to lead a company that is floundering? He has already had a year as CEO. He gets a base salary of $1 million, plus shares. Now, that he and the team have got the board to agree to the severance package, why not milk the company for $67 million and walk away?

It’s a no-brainer. And a clear abdication of the board’s responsibility.

Sadly, it's harsh for the employees who will lose their jobs - now fighting for adequate compensation.

Why should the leadership team walk away with their pockets overflowing with cash? I think it’s wrong. Take the $122 million back and distribute it to the +3,200 employees who have lost their jobs. That works out to $38,000 per employee, a decent enough amount.

Leadership is to blame for the position Twitter is in today.

But, instead, rank and file employees must pay for the failure, not Agrawal, Segal and Gadde.

This fiasco is, for me, an example of…

1.????Failure of the board, to protect the interests of the shareholders,

2.????They also failed, in my view, to find the right CEO to replace Dorsey,

3.????How incentives can drive leadership decisions.

4.????Greed and the power of self-interest.

What do you think?

PS: Thanks to Rajeev Peshawaria for introducing me to Steven Kerr's paper on incentives.