Carl Icahn’s criticism of eBay’s board highlights Silicon Valley’s systemic issues

The compositions of the boards of Silicon Valley companies are once again in the spotlight.

Recently, Twitter was called out for having a board comprised of members of the “Silicon Valley Boys’ Club.” Now Carl Icahn is accusing eBay board members of being in conflict. He wrote an open letter to eBay shareholders excoriating its management and board for various alleged lapses in corporate governance.

Amongst the issues that Icahn raised were that eBay board member Marc Andreessen had been investing in, advising, and profiting from companies that had been spun off from eBay — or competing with it. Another director, Scott Cook, had significant ownership in Intuit — which competes with eBay’s PayPal division. Cook had asked eBay not to hire Intuit employees — which limited eBay’s competitiveness. And Icahn asked: “How can the board have a conversation about the strategy or performance of PayPal when a representative of a direct competitor who has so much at stake is in the room?”

I doubt that Marc Andreessen or Scott Cook believed that they had done anything wrong. They are both stalwarts of Silicon Valley and are greatly admired. They would not likely do anything that was illegal or considered unethical.

Therein lies the tech industry’s problem: this sort of wheeling and dealing is common. It is considered normal and acceptable behavior. The industry doesn’t understand the intricacies of corporate governance. It has gotten away with such practices — and worse for a long time. Note the lawsuit that the Department of Justice filed against Google, Apple, Pixar, Lucasfilm, Adobe, Intel, and Intuit for their anti-competive hiring practices during the second half of the 2000s. The evidence that emerged showed that the CEOs of these companies were openly collaborating. And note how Twitter went public with an all-male board and its CEO casually shrugged off criticism.

When the tech industry was in its infancy, it was held to a low standard. Frat-boy behavior was tolerated, and the industry was a source of amusement. Now technology is an important part of the global economy. Technology companies are valued higher than the traditional blue chips and rake in billions in IPOs. They are expected to be exemplary, rather than laggards.

The problems begin when start-ups raise venture capital. Venture firms demand board seats as a condition of their investments. Typically, each major investment firm gets one of five to seven board seats. There are usually several firms involved in a funding transaction, so investors often end up with the majority. Laws, and Securities and Exchange Commission rules govern how public-company boards must operate. In private industry, things aren’t that clear.

Evan Epstein, executive director of Stanford’s Rock Center for Corporate Governance, with which I am affiliated, explains that venture capitalists have dual-fiduciary duties: both to their limited partners and to their portfolio companies. But their controlling duty is to the portfolio company — not to their fund. Conflicts often arise. For example, the founder may want to grow the company, but the venture capitalists may want to sell because he may need an exit to justify returns on his fund and raise a new fund. When this happens, the venture capitalist should act to the benefit of all shareholders — not just their own.

It rarely works this way. Venture capitalists on boards usually act in the interests of their funds. They sometimes breach their fiduciary duty to the companies. Few eyebrows are raised when this happens.

The same type of behavior sometimes spills over to public companies even though the rules of the game are different. In public companies the board is legally required to protect the interests of all shareholders—to prevent self-interested company executives (and board members) from taking actions that benefit themselves above all. That is why Congress and regulators have been mandating that the majority of directors on public company boards be independent.

As we saw when Twitter filed for its IPO, chief executives recruit board members with whom they have long-term relationships and who are more inclined to support their actions and provide them higher compensation packages. That is why these boards are like Boys Clubs and why Silicon Valley is taking so much fire.

Jeffrey Sonnenfeld, senior associate dean of executive programs at Yale, believes that the tech industry’s increasing overconfidence has been overshadowing its corporate governance practices. “Fifteen years ago, the cloud of ‘e-governance’ bravado settled in on Silicon Valley putting a gloom over good governance with the belief that ‘we’re different out here, ‘ ” Sonnenfeld said.

It is time for Silicon Valley to lift that cloud. Said Sonnenfeld: “Courageous entrepreneurial risk taking and owner accountability are not mutually exclusive. Technology executives must start broadening their own networks and boards — or they will run the unintended cross enterprise pathologies of insider trading, self-dealing, competitor collusion, old-boys’-club staffing, insular strategic thinking and group think decision making.”

For him, Apple was brilliant to go after J. Crew’s Mickey Drexler for candid, informed new ideas, just as Facebook was wise to enlist Don Graham. Now is the time for Silicon Valley to learn its lesson.

This post originally appeared on WashingtonPost.com.

Vivek Wadhwa is a fellow at the Rock Center for Corporate Governance at Stanford University, director of research at the Center for Entrepreneurship and Research Commercialization at Duke’s engineering school and distinguished scholar at Singularity and Emory universities. His past appointments include Harvard Law School and University of California Berkeley.