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ESG insights for private companies

Governance best practices in public markets

Hillary Flynn, Director of ESG, Private Investments
Celi Khanyile-Lynch, Sustainability Analyst
2022-02-01
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

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

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. Where multiple-class share structures exist, we encourage 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.
  • 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. We take a more unfavorable view on governance 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. This can be the failure to implement shareholder proposals that have received majority support, the reelection of directors who received less than a majority of votes, or implementation of poison pills without shareholder approval.

Board composition

In our view, businesses create shareholder value by appointing directors who foster healthy debate in the boardroom, develop constructive relationships with management, and challenge the team when appropriate. This is not possible unless boards…

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Authored by
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Hillary Flynn
Director of ESG, Private Investments
Boston
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Celi Khanyile-Lynch
Sustainability Analyst
Boston