Investing expert Benjamin Graham, Warren Buffett’s mentor, warns shareholders to pay careful attention to whether their companies give proper recognition to the interests of average outside shareholders.
I fear that Google Inc (NASDAQ:GOOG) may not pass this test. Here’s why.
According to its 2013 proxy, Google Inc (NASDAQ:GOOG) has now invested almost $12 million in 23andMe, a private personal genetics company co-founded and led by Google Inc (NASDAQ:GOOG) co-founder Sergey Brin’s wife, Anne Wojcicki. The proxy also indicates that Google Inc (NASDAQ:GOOG) leases office space to 23andme.
Investors should also note that the 2007 8-K disclosing Google’s initial investment also clarifies that Brin provided about $2.6 million of interim debt financing to 23andMe, and that Google’s investment was used to repay this debt. In other words, Brin had at least two personal reasons to favor Google’s investment — the fact that it would help his wife’s company and the fact that it would help him get his $2.6 million back. And Google’s average outside investors do not share in these interests.
As shady as I think this looks, investors should note several disclaimers made by Google Inc (NASDAQ:GOOG) management surrounding this investment, including:
- The transaction was approved by Google’s audit committee as required by the company’s policy for related-party transactions.
- The audit committee’s decision-making process included advice from independent counsel and an independent valuation of 23andMe.
- Sergey Brin recused himself from discussions in which Google Inc (NASDAQ:GOOG) evaluated 23andMe as a potential investment.
However, these disclaimers do not eliminate my concerns. For starters, neither the 8-K announcing Google’s initial investment in 23andMe, nor Google’s subsequent proxy, share relevant details about the advice given by the independent counsel they consulted or the independent advisor’s report on 23andMe’s valuation. In other words, while these filings made it clear that management considered outside advice, they didn’t clarify what that advice was so shareholders could verify that these transactions were in their best interests.
Also, as Google’s 2012 proxy points out, Brin controls almost 28% of the voting power associated with Google’s outstanding stock. This means he has an overwhelming say in which directors will be re-elected. This could put significant pressure on the directors who sit on the audit committee to push through decisions that please Brin.
A broader trend
Other founder-led businesses have also reported a large number of related-party transactions in their 2013 proxies. As I pointed out in a previous article, Las Vegas Sands Corp. (NYSE:LVS) was involved in a number of questionable transactions with CEO/Chairman Sheldon Adelson’s family members, and with other businesses Adelson owned. Wynn Resorts, Limited (NASDAQ:WYNN) and Boyd Gaming Corporation (NYSE:BYD) also reported several related-party transactions in their most recent proxies, such as employee use of company services and company-owned property and employment of relatives.