It has been a wild ride for Groupon the past few years. The daily deals website launched in 2008 and experienced nothing short of meteoric growth. Its revenue between 2008 and 2010 grew at an astounding rate of 8,611% a year. By January of 2011 the company had raised more than $950 million in funding, had 35 million registered users, and had rejected a $6 billion buyout offer from Google. Groupon proceeded with an initial public offering in November of that year – the biggest by a U.S. web company since Google. However, the post-IPO era for Groupon has been disappointing. The company’s stock has gone from the $20 IPO price to about $4.25 a share. Tough economic conditions, as well as growing competition from sites such as Living Social and Fab have significantly contributed to Groupon’s downfall. But the economy and competition are only a part of the story. Groupon’s board of directors has also played a substantial role in contributing to the decline in investor confidence in the company – highlighted by a recent report that Groupon board members have invested in a competitor to the site.
Earlier this year, Groupon’s accounting practices were called into question. The company had to restate its earnings twice within the first quarter after the IPO leading to an ongoing investigation by the SEC. As a result, this past April Groupon announced that it was replacing two-thirds of its audit committee with corporate board members with the appropriate expertise in accounting, including the Robert Bass, the Vice Chairman of Deloitte, and Daniel Henry, CFO of American Express. One would expect that the audit committee of a public company board would already be comprised of individuals with substantial financial expertise.
Just when it appeared that Groupon’s board was aligning itself with corporate governance best practices, an article in this week’s Wall Street Journal (http://on.wsj.com/TSMZSV) reports that two of Groupon’s founding board members have invested in a competitor to Groupon. According to the article, Groupon Chairman Eric Lefkofsky and director Bard Keywell have invested in Belly, a startup that helps local merchants manage their loyalty programs. It would appear that Belly is in direct competition with Groupon’s new loyalty program called Groupon Rewards. Although Groupon Rewards is a smaller component of the company’s business structure, there is at least the risk of violating their own fiduciary duties to Groupon. A director’s duty of loyalty to the corporation requires that they act at all times in the best interests of the company. How are Lefkofsky and Keywell acting in the best interests of Groupon if they are investing in a competitor? Furthermore, it goes beyond just investing – Belly spawned out of Lefkofky and Keywell’s startup incubator, Lightbank. Thus, instead of just capital, they are providing Belly with strategic guidance. It is hard to imagine how such guidance doesn’t involve insight from their involvement with Groupon.
The question is whether Lefkofsky and Keywell’s guidance to Belly extends beyond insight to actual inside information from Groupon that could assist Belly to gain an unfair advantage. Even if it does not rise to the level of a conflict of interest, aren’t Lefkofsky and Keywell missing the point that perception is everything? At a time when Groupon’s Board of Directors can ill-afford to appear ready to meet the challenges in front of them, Lefkofsky and Keywell have placed in question whether Groupon’s board is up to the task.
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