Over the last several years, we’ve observed certain trends that are shaping corporate governance and which we believe will impact the board of the future. We structured our 2014 Annual Corporate Directors Survey to get directors’ views on these trends and other topics including:
Posts Tagged ‘Surveys’
This is our second annual report on board leadership.
The numbers and trends are interesting but the subtleties and substance behind them are extremely valuable as the National Association of Corporate Directors (NACD) and Korn Ferry continue their study of high-performing boards. The thoughtful selection and performance of board leaders is one of two pillars of leadership that drive long-term shareholder value—the other being the CEO of the company.
There is universal agreement that each board must have an independent leader but how each company has achieved this takes many shapes.
In this year’s report, we see continued evidence of a slow and deliberate trend toward separation of the roles, higher in mid-cap companies than the large-cap S&P 500. Key catalysts included activism, and a transition of CEO leadership that prompted the board to elect to separate the roles. Between this report and the next, Korn Ferry and NACD will be in active discussion with companies that have changed leadership structures in the last several years and will ask the following questions to uncover what is driving long-term shareholder value:
Our study provides a comprehensive analysis of the 2013 US IPO market.
We examined several key aspects of IPOs, including:
- The JOBS Act
- Financial profiles and accounting disclosures
- SEC comments and timing
- Corporate governance
- IPO expenses
- Deal structure
- Sponsor-backed companies
We reviewed 100 of the 136 IPOs that priced in 2013 and met our study criteria.
We analyzed the terms of 156 venture financings closed in the first quarter of 2014 by companies headquartered in Silicon Valley.
Overview of Fenwick & West Results
Valuation results in 1Q14 were very strong.
- Up rounds exceeded down rounds 76% to 8% with 16% flat. The 68 point difference between up and down rounds was the largest since 2Q07, when the spread was 70 points
- The Fenwick & West Venture Capital Barometer™ showed an average price increase of 85%, a significant increase from 57% in 4Q13.
- The median price increase of financings in 1Q14 was 52%, a significant increase from 27% in 4Q13 and the highest amount since we began calculating medians in 2004.
- Software and internet/digital media continued to be the strongest industry sectors, with life science, cleantech and hardware lagging but showing respectable results. The percentage of all financings that are for software companies has trended up in recent years, hitting 45% in this quarter.
- The use of senior liquidation preference fell for the third quarter in a row, an indication of companies having leverage in negotiations with investors.
2013 was the strongest year for venture-backed initial public offerings (IPOs) in almost a decade: 82 deals (the most since 2007) generated aggregate proceeds of over $11.2 billion, an average offering amount of $137.2 million. At least one venture-backed company went public each month in 2013, and the pace of IPOs has accelerated in the first three months of 2014.
Much corporate finance research is concerned with causation—does a change in some input cause a change in some output? Does corporate governance affect firm performance? Does capital structure affect firm investments? How do corporate acquisitions affect the value of the acquirer, or the acquirer and target together? Without a causal link, we lack a strong basis for recommending that firms change their behavior or that governments adopt specific reforms. Consider, for example, corporate governance research. Decisionmakers—corporate boards, investors, and regulators—need to know whether governance causes value, before they decide to change the governance of a firm (or all firms in a country) with the goal of increasing firm value or improving other firm or market outcomes. If researchers provide evidence only on association between governance and outcomes, decisionmakers may adopt changes based on flawed data that may lead to adverse consequences for particular firms.
The Conference Board, NASDAQ OMX and NYSE Euronext announced last week the renewal of their research collaboration to document the state of corporate governance practices among publicly listed corporations in the United States.
The centerpiece of the collaboration is The 2014 Board Practice Survey, which the three organizations are disseminating to their respective memberships. Findings will constitute the basis for a benchmarking tool searchable by market index, company size (measured by revenue and asset value) and industry sectors. In addition, they will be described in Director Compensation and Board Practices: 2014 Edition, scheduled to be released jointly in the fall.
It is hard to gainsay the observation that business law practice has evolved significantly over the last three decades. Fields as distinct as corporate, securities and mergers and acquisitions law have substantially merged with a host of traditional “business school” topics, such as accounting, finance, strategy, project management and risk analysis. Although some law schools have endeavored to keep up with these changes in business law practice, their reaction has been somewhat sluggish. Indeed, many major law firms with sophisticated business law practices have expended significant resources on training their junior associates (or retraining their experienced attorneys) through “mini-MBA” courses, business boot camps, and similar programs offered either through third parties, partnerships or in-house expertise. Nevertheless, it is our view that law schools can and should continue to work to provide this type of training to students in partnership with efforts already under way at law firms. Such efforts are certainly key components to creating sophisticated lawyers for the next century.
Amid the recent uptick in U.S. IPO transactions to levels not seen since the heady days of 1999 and 2000, Davis Polk’s pipeline of deals remains robust, leading us to believe that strength in the U.S. IPO market will continue in the near future. With ongoing pressure on companies that are past the IPO stage to update or modify their corporate governance practices to align with the views of some shareholders and proxy advisory groups, we thought this would be a good time to review corporate governance practices of newly public companies to see if they have also shifted in recent years. Our survey is an update of our October 2011 survey and focuses on corporate governance at the time of the IPO for the 100 largest U.S. IPOs from September 2011 through October 2013. Results are presented separately for controlled companies and non-controlled companies in recognition of their different governance profiles.
In our recent NBER working paper, The Value of Corporate Culture, we study which dimensions of corporate culture are related to a firm’s performance and why. Resigning from Goldman Sachs, vice president Greg Smith wrote in a very controversial New York Times op-ed: “Culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years.” He then adds “I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years.” In his follow-up book, Greg Smith seems to blame the demise of Goldman Sachs’s culture to its transformation from a partnership to a publicly traded company.
While highly disputed by the company, Greg Smith’s remarks raise several important questions. What constitutes a firm’s culture? How can we measure it? Does this culture—however defined and measured—impact a firm’s success? If so, why? And how can different governance structures enable or curtail the formation and preservation of a value-enhancing culture? In this paper we try to answer these questions.