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Who says workshops can't be fun?
CEOs, Boards and Advisors: How to Build a Winning Company
For those who missed our session, stay tuned! Due to requests, we will repeat it next year!
MARK YOUR CALENDARS!
Give youself a new year resolution treat and register for
MAXIMIZE YOUR BOARD POTENTIAL 2019!
June 3-6, 2019
Harvard Faculty Club
Nine years running, this invigorating program addresses the challenges of global governance.
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Governance: Trends to Watch
We named our newsletter “Governance Matters” because it does! The double entendre is intentional: we report about governance matters and we do it because they matter. As we look at emerging trends, here are two keys ones to note.
Deepening Scrutiny of Drector Duties
There is an uptick in private company lawsuits, particularly in Delaware, all related to poor governance practices. Examples of the increasing case load in Delaware include the Trados case (2013) and Nine Systems case (2014). In these, the question relates to where duty of loyalty fall. In each, the finding is that fiduciary duties of directors from venture backed companies are owed to the corporation and its common shareholders, not to the preferred shareholders who benefit from the contractual rights instead.
Under review, too, are fact patterns, particularly seen in Silicon Valley boards, regarding adherence to the business judgement rule. Cases where co-ownership of private planes and private islands, etc. are now subject to more stringent review relative to the entire fairness standard. New practices are more intensive, as the company must analyze if the price and process of such transactions are fair, exposing directors and investors that fail to manage this process correctly to litigation and personal liability. Companies must show records of evaluated fairness, e.g., board minutes, opinion letters, market checks, rights offerings. The must use “majority of the minority” stockholder votes in conflicted transactions.
Further, the Intangible Assets Law Suits– 2017 Report notes that IA adds twice as much value to products as tangible capital, across 19 global value chains. As a consequence, suits by shareholders because boards don’t address IA well, negatively affecting bottom line and company reputation
Slower to Market: Staying Private
“In the modern era, public market time horizons have never been shorter and private market time horizons have never been longer.” Marc Andreessen
As of April 12,2018, 233 unicorns valued a total of $777billion. Yet, a watchful eye of governance is corporate practices is underway. In the face of governance failures of Uber, Theranoa, Zenefits, SoFi, new investigative work is checking about practices related to independent directors, diversity, shareholder right disclosure, and overboarding (having directors who simultaneously serve on too many boards).
The new reality since 2017 is that companies are choosing to stay private. These quasi-public companies such as Airbnb, SpaceX, and WeWork are able to grow and stay private because of new access to money.Private market financing is more available.Softbank’s Vision Fund of $93 billion is for “technology investments in need of patient long term capital and visionary strategic investment partners.” Private secondary transactions are increasing on the Nasdaq Private Market (NPM), as 2017 was its biggest year with 3.2 billion in transactions (3x increase since 2016). Moreover, the 2012 Jobs Act extended the 500 shareholder rule to 2000 shareholders for public registration, making it easier to stay private longer. Investment terms are more favorable as well with liquidation preferences, ratchet and IPO blocking rights.
And, Long Term Stock Exchange is seeking SEC approval to build a new exchange, which enables companies to stay private.
Who can blame a company from being attracted by the option to stay public? The demands of regulatory compliance and resources needed to avoid activist investors threats can be daunting. The cost of proxy battles, publicity campaigns, shareholder resolutions, litigation and negotiations with activist shareholder went from $ 2.7 billion in 2000 to $ 121 billion in 2017.Applying More resources for investor relations. More defensive approaches in bylaws and articles of incorporation to protect from attacks often feels it is at the expense of driving the business performance.
Making no mistake, this trend is no excuse for lax governance practices. Noteworthy as both trends are, our message holds: governance matters!I
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