On Tuesday, March 21, NACD Southern California hosted a luncheon program at the DoubleTree Hilton in Santa Monica titled, “Five Key Questions Directors of Emerging Companies Should be Asking.” Five experts delivered “Ted Talk-like” presentations, each addressing one key question on key issues for emerging growth companies. Following the presentations, attendees met with presenters one-on-one for additional conversation. The panel was moderated by Larry Taylor, executive committee member on the board of directors for the NACD Southern California chapter and Chairman of the Board for The Creighton Group, an international corporate governance advisory firm.
Key Questions and Takeaways:
Linda Steffen – Lead Consultant – Meridian Compensation Partners
1. How do executive and director compensation programs evolve after an IPO and what are the greatest challenges?
Many emerging growth companies breathe a sigh of relief after successfully going public, and while it may feel like it’s time to kick back, it’s actually time to focus on the hard work of making plans for future disclosures on past and future compensation decisions and the logic behind them. Board composition will quickly change, particularly for key committees such as compensation. Three key compensation challenges following an IPO are peer group selection, remixing the board and reducing board compensation, and incentive structure. Peer group selection is crucial and difficult to change once established so it needs to be a primary focus of the compensation committee as it will impact pay levels and program design significantly. As the board shifts from founders/investors to independent directors, the equity/cash relationship will change and overall levels of compensation will likely decline. Incentive design for management needs to be carefully structured and balanced based on corporate circumstances and peer group comparisons.
Jonathan Friedman – Partner – Stubbs Alderton & Markiles
2. How should we change the structure of the board of directors to ensure effectiveness as the company transitions through its growth cycles?
A good, functioning board of directors is a continuous evolution, and an invaluable asset for achieving value for company stakeholders. Creating a framework for identifying strong independent directors requires taking a hard look at strengths, weaknesses, opportunities, and threats for the founders, yourself, and the company as a whole. Consider someone with entrepreneurial experience at a similarly sized company who could be available to call upon anytime for invaluable guidance. Individuals with experience in your market, or with a similar product or service, or a person with a Rolodex of investors may be useful to the company. Consider a diverse group of board members that will create a bit of tension between the management team and board to ensure accountability, while also focusing on personalities that provide a sense of team. As a company matures, and especially when going public, you will need a fresh look at your governance, compensation, and audit committees.
Michelle Wroan – Partner – KPMG
3. How and when in our growth cycle should we transition from a local CPA firm to a Big Four professional services firm?
The need to move on from a local or regional CPA firm to a larger, professional services firm often comes much earlier than expected for emerging growth companies. Growth and expansion create bigger needs, and handling these decisions early on with a Big Four professional services firm is cheaper and more efficient than changing firms later. A company may be ready for these services when approaching a full-fledged Series A financing or accessing venture growth capital, or perhaps when the company it is at the stage that it can raise debt. A one-stop shop professional services firm reduces the costs and inefficiencies of sourcing multiple services through several firms. A Big Four firm’s domestic and international credibility and expertise can also be leveraged to guide a company through global expansion as well. Importantly, a larger firm can grow with you, offering ad hoc services to help get accounting issues right the first time and ensure adequate preparation for future audits.
Larry Cabaldon -- CEO – Boardroom Performance Group
4. What are the best practices for refreshing the board of directors when transitioning from a privately owned company to a publicly traded company?
You can have the greatest strategy and all the right rules, but if you don’t have the right talent, it’s not going to happen. Benchmarking the talent needed to produce results can help assess if you have the right people on the board for the task at hand. Get to know the TSR, not the total shareholder return, but Talent + Strategy = Results. Challenge everyone in the boardroom to look at his or her performance because everybody wants to do well. Set criteria to measure performance and maintain accountability. Consider transitioning out board members missing the mark, such as family members on the management team that are not meeting expectations, or aggressive personalities that may stifle progress. Come up with a score that fits your organization and know what you need to do to improve it.
Elliot Hinds – Partner – Crowell & Moring
5. How can the Jobs Act be effectively used to raise capital for emerging companies?
The Jobs Act has created several categories of funding that allow companies to test the waters and ramp up to being a full, public company over a period of 5 years. 80% of the companies that have gone public since 2012 are emerging growth companies with under $1 billion in annual gross revenues. Following the Jobs Act, companies can now make a general solicitation to tell their story as long as they’re selling to accredited investors. The Jobs Act most recently provided another great funding opportunity in Regulation A+, which created two tiers of small public offerings that can be used for equity, debt, or other types of securities issuance. Reg A+ provides options for up to $20 million (Tier 1), and up to $50 million (Tier 2), far beyond the $5 million cap from the old Regulation A.