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Sunday, September 11, 2011

Corporate Federalism: AOL

Citing twelve past and present AOL employees, the Wall Street Journal characterizes AOL as a “culture of clashing fiefs and personalities created by a rapid series of acquisitions that haven’t jelled.” Just in managing the likes of Michael Arrington and Arianna Huffington, Tim Armstrong has had his hands full as CEO. Both Arrington and Huffington have been streadfast defenders of editorial independence in their respective units, even as Arrington has started a venture capital firm partly financed by AOL to invest in tech firms even as Arrington’s division at AOL, TechCrunch, writes on technology firms. The problems for AOL go beyond acquiescing in a structural conflict of interest of TechCrunch writing on particular tech companies while investing in some of them but not others. The Journal cites a person familiar with AOL as saying that Armstrong “had a macro vision that was right but didn’t have the right plan to implement it.”

In terms of corporate governance and leadership, vision is determined or decided on by a board of directors while the CEO is charged with devising and implementing a plan or strategy based on the vision. Too often, the vision is associated with the CEO simply because he or she enunciates it. Selling the vision is perhaps better handed by the president, who ideally presides over the management (i.e., representing the board). Even if the CEO is tasked with coming up with and selling a vision, he or she is better suited as chief executive to formulating and implementing a strategy or plan.

At AOL, the board should have focused on changing the corporate vision (and holding the management accountable on devising and implementing a strategy), while Tim Armstrong should have focused less on vision and more on coming up with a better strategy. At some level, the clash of egos that is involved in integrating or coordinating acquired businesses that had been stand-alone is itself a formidable task for any CEO. Reconciling or constraining previously-autonomous editors in the interest of corporate coordination without creating conflicts of interest is a difficult task. Personalities can exacerbate the difficulty involved in the turf wars.

AOL might be a good candidate for a federal system of governance, wherein publishing units need some autonomy from the pressures of corporate coordination. In such a system, each division or acquisition is like a semi-sovereign state with some autonomy from the general government. Editors at TechCrunch and the Huffington Post could use this limited autonomy to protect their respective publishing units from being swayed by financial interests either of another division or AOL as a whole. At the same time, AOL’s enumerated powers could give it the ability to achieve synergy from the otherwise disparate divisions. These domains should be such that conflicts of interest are obviated.

The key to such a corporate federal system of governance would be having a “third party” within the company or perhaps consisting of outside directors to hear contested cases of division or company over-reach. It could be that such a judiciary consists of an equal number from headquarters and the divisions, or of outsiders who are not even on the board—though the problem of aligning incentives to the long-term interest of the company would have to be addressed. 

The federation form—similar to the Japanese conglomerate “family” of businesses centered around a banking division though with each division having some autonomy from headquarter—is perhaps ideally suited to a publishing company in which pressure exists to tailor articles to particular companies favored financially by a division or the publishing company as a whole. In other words, reconciling editorial freedom (and credibility) with the synergy possible from corporate coordination (otherwise why make the acquisitions in the first place?) may be well-suited to the federal form wherein the parts and whole each of some areas of autonomy from the other. The limited autonomy itself must be in the stockholders’ long-term financial interest; this is not difficult, as sacrificing editorial freedom for immediate financial gain is typically detrimental in the long run. AOL’s vision should include such matters as governance structure as long as the company retains separate though related publishing enterprises.


Jessica E. Vascellaro and Emily Steel, “Culture Clashes Tear at AOL,” Wall Street Journal, September 10-11, 2011. http://online.wsj.com/article/SB10001424053111904836104576558993970961586.html?mod=WSJ_hp_LEFTWhatsNewsCollection