monkey-557586_1920A few weeks ago, The Wall Street Journal reported that two former directors of Theranos – the embattled blood testing company – “did not follow up on public allegations that…the firm was relying on standard technology rather than its much-hyped proprietary device for most tests”.

The report states that the two board members in question – a former admiral and Secretary of State, respectively – were on the Theranos board when concerns about the company’s device were aired publicly.  However, they seem to have believed that it wasn’t their job to ask questions, at least not in the absence of some sort of proof that the concerns were valid.  The former admiral said he “did not have the information that would tell me that it’s true or not true”; the former Secretary of State said that “it didn’t occur to” him to ask questions, adding “[s]ince I didn’t know, I didn’t have anything to look into”. Continue Reading Ducks and monkeys

back-to-school-954572_1280My last post was a re-posting of Adam Epstein’s great piece on the importance of the proxy statement.  I promised that I would follow up on Adam’s thoughts with some recommendations of my own.  Here goes.

General

  • Manage your proxy statement “real estate” to maximize user-friendliness and create an optimal flow: Think about where things go.  For example, if your company is owned largely by institutions (and perhaps even if it’s not), should you lead off with an endless Q&A about the annual meeting and voting, discussing such exciting topics as the difference between record and beneficial ownership and how to change your vote?  Some of it is required, but consider taking out what’s not required and moving what is required to the back of the book.
  • Use executive summaries: Investors like them, and even the SEC has more or less endorsed their use. Think of it this way – whatever you think of ISS, it does a great job of summarizing your key disclosures, albeit not with your company’s best interests in mind.  Why pass up an opportunity to convey your key disclosures with those interests in mind?

Continue Reading Required reading (Part 2)

board-1848717_1280Those of you who know me have probably heard me sing the praises of Adam Epstein.  Adam was trained as a lawyer, has been an investor, and now advises small-cap companies on matters like board composition and disclosure.  IMHO, Adam is brilliant, and his insights need to be read, absorbed and acted on.

Adam has given me permission to copy one of his recent writings here.  It was originally posted on NASDAQ MarketINSITE.  His writing addresses how important it is for small-caps to get their proxy disclosures right.  My only quibble with it is that it’s not only true for small-caps; it’s equally true for any company that seeks to get favorable votes from institutional investors.  On the subject of singing (see above), I’ve been singing this song for a long time to minimal effect, but I’m hopeful that great advocacy from people like Adam will once again prove that justice delayed isn’t always justice denied.  By the way – Adam has written a book on the importance to small companies of getting the right board members.  I don’t often read books of that type, but Adam’s is a gem.

Here’s the posting:

Considering that 78 percent of activist campaigns were waged in companies with market capitalizations below $2 billion in 2016 (according to Activist Insight), it’s incumbent upon small-cap companies to communicate clearly about issues investors care most about. Notwithstanding the fact that proxy statements address many of those issues (e.g., board composition, compensation, etc.), too many small-cap boards outsource responsibility for drafting and refining proxy statements. That’s a mistake.

Consider a few suggestions in this regard from a buy-side perspective.

Board composition. Proxies provide an invaluable opportunity for companies to clearly answer a top-of-mind concern for seasoned investors: does a company have fulsome, objective, value-added governance, or is its board primarily composed of the CEO’s friends (i.e., oversight “lite”)? The most effective proxies set forth how the backgrounds of each board member map to a company’s key strategic imperatives, key enterprise risks, and key stakeholders and customers. An inability to succinctly explain why a company has the right people in the boardroom should serve as a warning to the board that it might be time to refresh its directors.

Compensation. Most small-cap investors aren’t compensation consultants or human resource experts; it’s unwise to draft a Compensation Discussion and Analysis (CD&A) as if they were. Investors principally want to understand how officer and director compensation is aligned with strategic value drivers, particularly for companies that are performing poorly and/or compensating richly when compared to peers. Rather than just repeating last year’s CD&A, boards should spend time each year simplifying and clarifying key investor takeaways.

Storytelling. A proxy statement is a legal document, but great proxies tell a cohesive story about: (1) a company’s values, strategic imperatives and ownership; (2) who the company is run and governed by; and (3) how and why officers and directors are appropriately compensated (among other things). Why would a company expend material time and money perfecting its storytelling to customers, and then outsource a great chance to communicate directly with investors to service providers who can’t possibly know the story as well as those inside the company?

Plain English. When proxy statements are formulaic and lawyerly, savvy small-cap investors often think two things: (1) the company doesn’t value the opportunity to communicate transparently with shareholders; and/or (2) the company is trying to hide something. Most small-cap investors aren’t lawyers, and few captivating tales have ever been written in “legalese.” So if your proxy statement doesn’t tell a compelling story that virtually any investor can understand… consider starting over again.

In addition to selling goods and services, public companies also sell stock. And whether it’s to passive, active, current, or prospective investors, it’s hard to successfully sell stock when investors don’t sufficiently understand what they’re buying.

Thanks, Adam (and NASDAQ MarketINSITE).  I’ll be writing a bit more on this topic in the coming weeks.

 

waldryano
waldryano

I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”.  The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.

Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues.  Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary. Continue Reading The Financial CHOICE Act – everything you’ve ever wanted, and more?

William Hinman, the new Corp Fin director
William Hinman, the new Corp Fin director

As has been rumored, the SEC announced today that William H. Hinman will be the new director for the SEC’s Division of Corporation Finance.

Mr. Hinman, who recently retired as a securities and corporate finance partner from the Silicon Valley office of Simpson Thacher & Bartlett LLP, has advised in some of the larger IPOs in the technology section in recent history such as Alibaba, Google and Facebook. Mr. Hinman replaces Keith Higgins, the former director of Corp Fin who left in January.

Given newly appointed SEC Chair Clayton’s stated desire to substantially reduce regulation and burdens to increase the IPO market, hiring Mr. Hinman seems to align with Chair Clayton’s vision. The number of public companies has decreased 37% since the high water mark set in 1997. While there may be many reasons for the decrease in IPOs and in the number of public companies, overly burdensome disclosure obligations certainly ranks among the top reasons (see conflict minerals, pay ratio, CD&A, XBRL . . . ).

While I doubt we will be going back to 20 page Form 10-Ks, let’s hope that the new Chair and Corp Fin director can jettison some of the most burdensome and least effective disclosure, that they can help make the public capital markets for potential small- and mid-cap issuers more robust, and that the SEC can move forward with other important initiatives.

In the hopefully unlikely event you were wondertraffic-lights-2147790_640ing if the compromise on government funding changed things vis-à-vis possible SEC rulemaking on political contributions disclosure, rest easy (or not, as the case may be).

The bar on such rulemaking that has been in place since the last appropriations bill (and, if memory serves me correctly, one or more previous appropriations bills) remains in place. However, the appropriations bill does not prohibit the SEC from addressing any of the remaining mandates under Dodd-Frank; the CHOICE Act that’s rumbling around Congress would prohibit work on those items.

Continue Reading Breaking news!!!! Nothing has changed!!!

Internet Archive Book Images
Internet Archive Book Images

I’ve previously commented on the surprising governance initiatives of the Conservative (yes, Conservative) Prime Minister of the UK.  Well, our friends across the pond are at it again – or maybe it’s just more of the same.

Specifically, on April 5, Parliament’s Business Committee issued a series of recommendations contemplating the following:

  1. The Financial Reporting Council (FRC) should be empowered, among other things, to report publicly on board or individual director failings.
  2. The FRC should rate companies on governance practices. The ratings would be color-coded (red, yellow and green), and companies would be required to reference them in their annual reports.  If you’re thinking of Hester Prynne’s scarlet letter, you’re not alone.
  3. Companies would be subject to a slew of new rules on pay:

Continue Reading Heck, Britannia!

SMU Central
SMU Central

Things are looking pretty good for the venture capital industry. Potential VC investors have a lot of money available, and industry and geographical trends show a positive outlook for VC investing in the near term. There are numerous factors that could negatively affect the outlook for VC investments, but it certainly appears that substantial VC investment activity could occur over the next twelve months.

The most significant positive factor for VC activity in the near term is the supply of available cash. According to a recent report, VC funds currently have approximately $120 billion available for investment. Even though this is a composite number that is applied across the whole VC industry, it is a huge amount of available investment funds.

Another positive factor is the increase in corporate VC investment. In a relatively short time (aided by large amounts of cash on corporate balance sheets), corporate investors have begun to play a key role in the VC industry, especially in larger deals. Last year corporate VC deals comprised 25% of total VC deals, and this percentage will continue to increase. See my prior blog post on the rise of corporate VC investors (Corporate Venture Capital Investments – Good for Startups?).

Continue Reading It’s a good time to be a VC fund

SDASM Archives
SDASM Archives

Even as we speculate about the likelihood and potential impact of massive deregulation here in the US, the EU is going in the opposite direction.  Earlier this month, the European Parliament passed a Shareholder Rights Directive that contains some “interesting” provisions, including the following:

  • Say-on-Pay: Issuers would be required to hold prospective and retrospective say-on-pay votes (i.e., shareholders would have to approve pay plans in advance as well as how those plans worked out). These votes would be binding unless a member state opts out of this provision.
  • Director Pay: While director pay has generated more scrutiny here in the US, the EU proposes to do something about it – specifically, it appears that director pay would also be subject to shareholder approval, though it’s not clear whether the mechanics would be the same as those for executive compensation. Note that shareholder proposals seeking a say-on-pay vote on director compensation have fared poorly here in the past.
  • Related Party Transactions: “Material” related party transactions would be subject to shareholder approval.

While these items seem pretty scary, the Directive includes some features that companies are likely to approve: Continue Reading Shore patrol

Cornell University Library
Cornell University Library

New York Surrogate Gideon Tucker (1826-1899) is credited with originating the maxim that “no man’s life, liberty or property are safe while the legislature is in session.”  Were Surrogate Tucker around today, he might have added boards of directors to those who should be wary of legislative action.

There are numerous weird bills rumbling around the hallowed halls of Washington these days, but one of the bills that is making me unhappy is the Cybersecurity Disclosure Act of 2017.  The good news is that the bill is very short.

The bad news is threefold. Continue Reading Beware when the legislature is in session