Terry Semel, the embattled chief executive of Yahoo!, resigned last night amid widespread pressure from investors over his lavish pay package despite a 35 per cent drop in the group’s share price.

In a statement yesterday, Mr Semel said that he had told Yahoo’s board that it was “my desire to take a step back sooner rather than later”.

“This is the time for new executive leadership, with different skills and strengths, to step in and drive the company to realise its full potential. It is the right thing to do, and the right time is now,” he said.

Mr Semel, 64, will stay on at the California-based internet company as a nonexecutive chairman.

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The move comes less than a week after Mr Semel faced fierce criticism from shareholders, disillusioned with Yahoo!’s poor performance over the past 18 months, while Mr Semel’s compensation package continued to climb. The executive made $71.7 million in pay and benefits in 2006, the highest of any S&P 500 chief executive and nearly nine times the $8.3 million taken home by the average leader of an S&P company. Investors were so concerned about Yahoo!’s future that only 66 per cent of votes cast at last week’s annual shareholders meeting were in favour of keeping the group’s current board lineup. The previous year, 99 per cent voted to reelect Mr Semel.

The move to oust Mr Semel is the latest example of a global rise in shareholder activism. In Europe, ABN Amro has effectively been put up for sale after pressure from The Children’s Investment Fund, the activist hedge fund that held a stake of about 1 per cent in ABN when it started its campaign to break up the Dutch bank.

Last week, Vodafone, the mobile telecommunications group, came under pressure to change its strategy from Efficient Capital Structures, which holds just 0.0004 per cent of Vodafone’s shares.

Mr Semel, a long-time Hollywood executive who took over the running of Yahoo! in 2001, got off to a good start at the internet group. He is credited with successfully overhauling its sales force and boosting its advertising business by acquiring businesses such as Overture Services, which took Yahoo! into the lucrative market for internet search ads.

Yet the phenomenal growth of Google, which now has more than twice the sales of Yahoo!, and the entrance of so-called social networking sites such as Facebook and MySpace, has taken a toll on Yahoo!’s sales growth.

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