In all the theories and textbooks on corporate governance, my guess is that no one anticipated the current situation at Yahoo, where there is a war going on between the board of directors and a dissident shareholder essentially over who could dismantle the company faster.
It is hard to argue that things are going well at Yahoo. The previous strategy of shutting down three fourths of the company was successful in cutting costs, but with the unfortunate side effect of depriving the company of its image. No one knows what Yahoo stands for anymore. It does not help that a web site makeover so brazenly copied the style of the AOL web site. I now find myself frequently confusing Yahoo with AOL, something I never would have done in the past. It’s fair enough that shareholders would be scratching their heads. I mean, if you have the choice of every web site in the world to copy, why AOL? Just because you think they won’t be needing their design much longer? Yet it is the disappearance of so much of the company that really has users confused. As a Yahoo user, it is almost as if you don’t want to get comfortable with any of Yahoo’s services, because as soon as you come to rely on something at Yahoo, the company will shut that page down too.
And yet the only answer the dissident shareholder seems to have is to shut down the company faster. Fire more people, shut down more services, replace all the executives, basically just an acceleration of the strategy that brought about the current crisis at Yahoo.
It is a spectacle that an economist is hard pressed to explain. In theory, a shareholder’s ownership stake in a company should create an incentive to see the company succeed. Yet somehow, instead, we see a shareholder undertaking a series of actions that look like they are intended to drive a floundering company into the ground faster.
If this is startling from an economic point of view, it is not so strange when looked at through the lens of game theory. Game theory describes the actions of competitors as they try to anticipate each other’s actions, and as you can imagine, this can get very complicated very quickly. In game theory, it is not strange at all to see a person taking on a strategy that proceeds in exactly the opposite direction of the person’s own interests. A player can be tricked into this by other players. He can be trying to mislead everyone about his true intentions. Or he may just be so confused by the complexity of the situation that he loses track of what he was originally trying to do. It is that last scenario that seems to come closest to fitting many of the players in the Yahoo story at this point.