Those 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.