Cisco officials had dual interest in some late '90s acquisitions
By Jennifer Files
Mercury News
Cisco Systems' Chief Executive Officer John Chambers recused himself from voting on the networking giant's largest acquisition because he owned part of the company Cisco was buying, a spokesman said Tuesday.
The $7 billion deal in 1999 was one of several acquisitions Cisco made during the late 1990s involving companies in which Chambers and other Cisco officers and directors held stakes. The Cisco officials owned the stakes through personal investments in venture capital partnerships, including some tied to Cisco Vice Chairman Donald Valentine, a longtime Silicon Valley venture capitalist.
The valley's fast-paced entrepreneurial climate during the tech boom of the 1990s fostered tight relationships between venture capitalists, entrepreneurs and executives. But such dual-interest deals are drawing increased scrutiny as investors call for tighter controls on possible ethical conflicts of interest in the wake of scandals such as Enron.
Cisco said its executives acted ethically and that personal gain had no bearing on its corporate deals. Chambers gave all the proceeds he received in such transactions to charity ``to avoid the appearance'' of any impropriety, said spokesman Steve Langdon.
But others say that when executives have a financial stake in both sides of a transaction, the potential risks to shareholders outweigh possible benefits. ``At least this behavior is insensitive and at worst perilous,'' said Nell Minow, editor of the Corporate Library, a Web site that tracks corporate governance issues.
Details of the transactions were first reported in the New York Post.
Raising questions
``In the wake of the Enron scandal, we have the responsibility, and the media has the responsibility, to look at questions. But also we have the responsibility not to overreact before we have the facts,'' Macht said.
CalPERS -- the California Public Employees' Retirement System -- which has been a watchdog on corporate governance issues, owns 31.8 million Cisco shares, or 0.43 percent of the company.
With the exception of Cisco vice chairman Valentine, a general partner in the venture capital firm of Sequoia Capital, one of Cisco's early backers, all the executives made their investments as ``limited partners'' in the venture funds and so had no control over the funds' investment decisions.
Cisco policy allows such investments. Board members may vote on transactions in which they have a stake unless the stake is ``material,'' which Cisco policy defines simply as ``when it would affect their decision,'' Langdon said.
According to Langdon, Chambers owned stock through two venture partnerships in five companies Cisco acquired. He received a total of 127,625 shares of Cisco stock worth approximately $5.1 million when the acquisitions closed, but had donated all the shares to charity by August 2000, Langdon said. Chambers voted on four of the five acquisitions because his stake was very small, Langdon added.
Stake in Cerent
The other four deals in which Chambers held a stake stem from his 1996 investment of $50,000 in a venture capital partnership called Sequoia Technology Partners VII, created by Valentine's venture capital company. That partnership later invested in four companies Cisco acquired: Monterey Networks, StratumOne Communications, Ardent Communications and Pipelinks. Chambers received and later donated a total of 1,382 Cisco shares worth about $68,000 in those deals.
In all, Cisco bought 12 companies that various Sequoia funds had invested in. Eight other Cisco officers who invested in Sequoia funds include chief financial officer Larry Carter, chairman John Morgridge and Mike Volpi, who oversaw Cisco's acquisition strategy at the time.
Chambers' donation of the Cisco stock reflected a personal decision rather than a corporate one. Carter also gave away all shares he received in such deals, but Langdon said he did not know whether others kept their shares. ``If you look at the relative size of the distributions received as a result of Cisco acquisitions, they are inconsequential to their overall holdings of Cisco shares,'' he said.
Carter, for instance, received shares worth less than 0.1 percent of his total holdings in Cisco; stock Volpi received represented less than 0.4 percent of his Cisco holdings.
Venture capitalists give executives and board members the opportunity to invest in partnership funds partly to cement relationships; for instance, so that executives might refer deals to the financiers in the future.
`Culture of sloppiness'
``Your lawyer, your consultant, your venture capitalists and others tend to wear many hats and get involved in many relationships that in other industries or from other points of view clearly look complicated,'' said Randy Komisar, a former Apple Computer executive and prominent Silicon Valley financier.
``In the private company arena, this valley operates on trust and integrity. That's how we move quickly, that's how we find deals. . . . I can understand how it would look different from a public company than a private company,'' he said.
And that is where advocates for shareholders say problems could arise.
``I don't mean to suggest that these very distinguished people can be bought off for the kinds of sums we're talking about here. It does create a culture of sloppiness and cutting corners that can send a wrong message to the corporate managers and the investment community.'' Minow said. |
