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Groupon’s founder and executive chairman, Eric Lefkofsky, takes not a dime in cash for his services on the board. He doesn’t need to, of course. Last year his investment group, Green Media, made about $314 million when it cashed out of the Groupon stock it held ahead of the IPO.
Lefkofsky continued to hold 128 million shares of Class A stock and 1 million shares of Class B stock, according to Groupon’s most recent proxy form, which gave him and Groupon’s two other founders (CEO Andrew Mason and Bradley A. Keywell) 57.4% control of the company’s voting stock.
But despite all that, Lefkofsky’s labors at Groupon still come with a cash cost. According to documents filed with the SEC, Groupon uses companies linked to Lefkofsky for its marketing, logistics and legal services.
Groupon even admitted in its most recent 10-Q that this — and Lefkofsky’s other non-Groupon business dealings — represents a potential conflict of interest that may hurt the company. It said:[Lefkofsky’s] investments may be in areas that present conflicts with, or involve businesses related to, our operations. There can be no assurance that our business will not be adversely affected as Mr. Lefkofsky devotes less time to our business in the future.
Usually, when companies buy services from ad agencies, shipping companies and law firms they choose based on price and whether the vendor has the best offering for the company. Choosing vendors that your chairman is invested in raises an obvious potential problem: It can be hard to fire a company that screws up when that company belongs to the boss.
Groupon told us that the expenses were small and expected to decrease or vanish in the future, and that Lefkofsky’s companies were chosen because Groupon needs to scale quickly to avoid losing market share.
The payments are indeed not material to Groupon’s business. And, to be clear, Lefkofsky is not doing anything wrong or illegal. But the deals are another example of Groupon’s occasional tone deafness regarding its public image. (Another example: when Lefkofsky had to retract a statement claiming Groupon would be “wildly profitable” when it wasn’t.) The sums involved are peanuts for both Groupon and Lefkofsky—yet they require an embarrassing disclosure to the SEC that the company’s founder and chairman may be engaged in a conflict of interest.
- InnerWorkings: marketing services, gift cards and promotional procurement. Lefkofsky is a director of the company and has an ownership stake in it. Groupon paid InnerWorkings $2.5 million in 2011, and has paid another $1.3 million this year.
- Groupon says: InnerWorkings is one of the biggest print brokers in the U.S., the expenditures were of a one-time nature and the company expects InnerWorking’s assignments to decrease. IW got the job because Groupon needed the materials quickly and was familiar with the company.
- Echo Global Logistics: transportation and supply chain management. Groupon paid Echo $600,000 this year. (To complete the incestuous circle, Echo also uses InnerWorkings for print jobs and owns stock in Echo which it has sold over the years, according to InnerWorking’s 10-Q. And it’s not just Lefkofsky. Two of Groupon’s other directors, Peter A. Barris and Bradley A. Keywell, are or have been directors of Echo with ownership stakes. Barris has a similar link to InnerWorkings.)
- Groupon says: Echo handles payments for small-pack shipping for Groupon Goods, Groupon’s new discount retail operation. Echo is a freight broker that reviews, audits and pays the company’s bills. The majority of that $1.3 million is pass-through payments.
- Lefkofsky & Gorosh: law firm owned by Lefkofsky’s brother, Steven. Groupon said it paid L&G $695,000 in 2011 and expects to continue to use the firm in the future.
- Groupon says: The fee is such a tiny percentage of Groupon’s overall legal fees that it is a stretch to insinuate something negative is going on. L&G worked on a class action settlement and does not expect to ever spend significant sums with the firm.
The links have caught the eye of corporate governance watchdog GMI Ratings. In April, GMI’s Paul Hodgson called the company out. He said the interlocking directorships formed “a governance nightmare” that “raises serious questions about the ability of this board to perform its duties effectively.”
- The Charts Groupon Showed Wall Street Before Its Stock Tanked Show Parts Of The Company Shrinking
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