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Workday Inc.'s tangled governance could cloud success

What happens when a company takes the two-headed chief executive structure used for years by Research In Motion, bolts on Facebook's feudal-class voting rights and injects News Corp.'s nepotism worries? In the case of Workday Inc., it creates an eye-popping $3.9-billion (U.S.) valuation for a software company without any profit.

Despite the scars, Workday has its charms. Its cloud-based software for human relations departments is easier and faster to set up than complicated offerings from Oracle and SAP. It's often cheaper, too, explaining why sales are on pace to more than double this year. The company's two co-founders, David Duffield and Aneel Bhusri, have extensive experience in the industry. Workday also started generating cash from operations this year.

At the top of the initial public offering price range disclosed on Monday, Workday would be valued at about 11 times 2012 sales, assuming the frenetic pace of growth continues. That's a big premium to the heady valuation of seven times estimated sales ascribed to fellow software company But it's Workday's corporate governance that's really scary.

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The two PeopleSoft veterans (Mr. Duffield helped start it and Mr. Bhusri served on the board) will control two-thirds of Workday. That follows the lopsided ownership arrangement increasingly popular in Silicon Valley and means they won't have to worry about a hostile takeover like the one Oracle pulled off for their previous company in 2005. But it means other owners must tolerate whatever decisions they make and potentially forgo acquisition offers.

Managing the company also will become more difficult as Workday grows and rivals attack. When BlackBerry-maker RIM's growth started to sputter, it needed fast decisions, not a bumbling consensus from two chiefs. The rare dual-CEO setup was abandoned earlier this year.

Then again, Mr. Duffield is 72, and his departure would leave Mr. Bhusri the natural sole successor. Yet two of Mr. Duffield's children also work for Workday. Though not on the board, his son is in a senior role, earning nearly $500,000 last year. That means Workday's shareholders, like those at Rupert Murdoch's media empire, will be left to wonder whether familial matters won't get in the way of success. This Frankenstein's monster of governance could eventually prove destructive.

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