For private companies approaching the public markets, we believe there are key corporate governance practices that can help pave a path to strong relationships with public market investors. In our view, evolving regulations and market expectations make these factors increasingly important to both company valuations and access to capital. Building a company to this stage requires an incredible amount of hard work and innovation. As private companies begin this transition, we hope our insights as public investors can help make it as easy as possible for them to adapt to rising governance requirements so they can remain focused on growing their businesses.
Here, we share our views on public market governance best practices for shareholder rights, board composition, and executive compensation, in particular.
Shareholder rights are significant inputs into the analysis of a company’s governance. We encourage portfolio companies to make progress toward adopting the below best practices over time. We typically choose to engage on these topics rather than vote against the board, but rising market expectations signal increasing votes against directors for these issues.
- Voting power. We believe voting power should be equal to shareholders’ economic stake, with one vote per share as the appropriate standard. However, we understand that some founders want to maintain control during the pivotal early years of being public. Where multiple-class share structures exist, we encourage a vote-to-share ratio of no more than 10:1 and a time-based sunset provision to convert shares over time, preferably less than seven years. We also prefer a majority voting standard for amending bylaws or approving proposals.
- Annual election of directors and compensation plan. We believe that shareholders’ ability to elect directors and assess how executives are being paid are two of the most important shareholder rights. Allowing for an annual election of directors and approval of the executive compensation plans increases accountability. We believe companies that maintain a staggered board and/or less-than-annual Say-On-Pay frequency should adopt a time-based sunset provision, ideally phasing out the practice(s) over a period of no greater than three years.
- Election of directors by a majority of shareholder votes cast. In our view, the election of directors by a majority of votes cast is the appropriate standard, and governance is less favorable where plurality voting standards are in place.
- Receptivity to shareholder feedback. We view it negatively when directors appear to disregard shareholder feedback through the voting process, such as failure to implement shareholder proposals that have received majority support, reelection of directors receiving less than a majority of votes, or adoption of poison pills without shareholder approval.