Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How Supermicro Built a Board That Couldn't Stop the Fraud
Transcript
- Lucas: A company that went from a niche server maker to a multi billion dollar stock, only to admit it had been cooking its books for years — and the board sat through it all. Today we're looking at the Supermicro board and how its structure practically invited a decade of fraud. Luna: Supermicro — that's the one that settled with the SEC for seven-point-five million dollars back in 2020, right? And the stock got delisted from NASDAQ. Lucas: Exactly. And it's a case that keeps coming up in governance circles because the failures were so textbook. The CEO — Charles Liang — also chaired the board. The audit committee was signing off on revenue that simply didn't exist. And the directors, well, most of them had no experience in the semiconductor or data-center industries where Supermicro competed. Lucas: If these conversations have moved your work forward in some small way, the only reason this show stays ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo — no pressure, just a way to keep the episodes coming. Luna: Yeah, it's a good model — keeps the focus on the content, which is why we can spend a full episode on something like board structure. Lucas: So let's start with the structure. Supermicro went public in 2007. From day one, Charles Liang was both CEO and chairman. That's a concentration of power that governance experts generally flag as a red flag, but it's still common — roughly 40 percent of S&P 500 companies have a combined ceo chair. Luna: But in Supermicro's case, it wasn't just the titles. Liang also controlled a separate entity that did business with Supermicro — a classic related-party transaction. Lucas: Right. The board approved these transactions, but the SEC later found that the company was essentially fabricating sales to hit revenue targets. Between 2015 and 2017, Supermicro overstated revenue by at least 200 million dollars. The board's audit committee — which included three independent directors — signed off on financial statements that were materially false. Luna: So where was the independence? These directors were supposedly independent, but they weren't asking the hard questions. Lucas: That's the key. Independence on paper doesn't mean independence in practice. One of the audit committee members was a former accounting professor — so technically qualified. But the SEC's report noted that the committee met only briefly before signing off, and they didn't press management for details on revenue recognition. They also lacked industry-specific knowledge. None of the three had worked in hardware or semiconductors. Luna: It's hard to challenge a CEO on technical accounting if you don't understand the business model. I can see how a board would just defer. Lucas: And defer they did. In 2018, an anonymous whistleblower sent a letter to the board detailing the revenue manipulation. The board's response? They hired an outside law firm to investigate, but the investigation was limited in scope and didn't interview key finance staff. By 2019, the SEC had opened its own probe, and the board finally took action — but by then, the stock had already lost half its value. Luna: So the board's delay cost shareholders billions. Were any directors held personally liable? Lucas: Not really. The SEC fined the company seven-point-five million, but no individual directors faced penalties. The company also faced a shareholder class-action lawsuit that settled for 40 million dollars in 2021. But the directors themselves were largely protected by the company's indemnification policies and D&O insurance. That's a structural problem — boards can fail spectacularly and walk away. Luna: It makes you wonder what would have changed if the board had a lead independent director or a separate chair. Some companies have moved to split the roles precisely to avoid this kind of groupthink. Lucas: And Supermicro itself actually adopted a lead independent director in 2020 as part of its governance overhaul to get relisted. But it's worth noting that the lead director role is only as strong as the person in it. At Supermicro, the lead director was a longtime board member who had already been there through the fraud years. So you have to ask: was that real change, or just window dressing? Luna: Let's talk about the contrast with a company that handled a similar crisis better. I'm thinking of IBM in the early 1990s — they had a board that actually forced out the CEO when the company was near collapse. Lucas: Great comparison. IBM's board in the late 80s was famously insular — mostly current and former executives, with a few outside directors who were also CEOs of other large companies. But when IBM's earnings collapsed in 1991, the board did something unusual: they formed a special committee of outside directors, led by Jim Burke of Johnson & Johnson, that ultimately forced CEO John Akers to resign in 1993. They then hired Lou Gerstner from outside, which was a radical move for IBM. Luna: So what made the IBM board effective when the Supermicro board wasn't? Was it just the severity of the crisis? Lucas: Partly. But also the composition. IBM's outside directors had deep operating experience — they ran major companies themselves. They understood what a turnaround looked like. Supermicro's independent directors, on the other hand, were mostly academics and retired executives from unrelated industries. One was a former CFO of a software company, but that's different from understanding server hardware margins and supply chains. Luna: There's a lesson there for investors: you can look at a board and see if the directors have actually done the kind of work the company does. Lucas: Exactly. And there are other structural red flags. Supermicro had staggered board terms, meaning only one-third of directors stood for election each year. That makes it harder for shareholders to replace underperforming directors quickly. The company also had a classified board structure that made hostile takeovers nearly impossible. So the board was essentially insulated from both internal and external pressure. Luna: I've read that companies with staggered boards tend to have weaker governance metrics overall. It's like the board is protecting itself from accountability. Lucas: There's a study from Harvard Law School that found firms with staggered boards have significantly lower firm value, especially in industries with high information asymmetry — which is exactly the situation at a company like Supermicro, where the board relies on management for technical data. The combination of a ceo chair, a staggered board, and a lack of industry expertise is almost a recipe for disaster. Luna: Let's talk about what happened after the SEC settlement. Supermicrio was delisted in 2019, but it returned to NASDAQ in 2020 after overhauling its board and adding new independent directors. Lucas: Right. They added three new independent directors, including a former SEC commissioner and a tech CEO with hardware experience. They also created a separate chairman role — but Charles Liang stayed on as CEO, and the new chairman was actually a former Supermicro director who had been on the board during the fraud period. So again, questions about genuine independence. Luna: It sounds like the changes were more about checking regulatory boxes than truly reforming the culture. Lucas: That's the criticism. And the stock has performed well since relisting — it's up something like 300 percent from its 2020 lows. But governance watchdogs still flag the company. Institutional Shareholder Services, ISS, recommended voting against the re-election of certain directors in 2022, citing concerns about oversight. Luna: So an investor who bought Supermicro after the scandal might have made money despite the governance issues. That's a frustrating reality. Lucas: It is. And it highlights a broader tension: markets often reward outcomes, not processes. But for a long-term investor, governance quality is a leading indicator of risk. The companies with strong, genuinely independent boards tend to avoid blow-ups. Supermicro is a case study in what happens when you ignore those signals. Luna: If someone listening wants to assess their own portfolio for these red flags, what are the top two or three things they should look for in a board? Lucas: First: is the CEO also the chair? If so, is there a truly independent lead director with real power to set agendas? Second: do the directors have relevant industry experience? A board full of former bankers and lawyers might not catch accounting tricks in a hardware company. Third: look at related-party transactions. If the CEO or board members have financial ties to suppliers or customers, that's a conflict that needs rigorous oversight. Luna: Simple framework, but it would have caught Supermicro early. Lucas: Absolutely. And that's really the point. Good governance isn't about following a checklist — it's about creating a culture where directors feel empowered to say no to a powerful CEO. Supermicro's board never had that culture, and shareholders paid the price.