Little to 'like' in new firms' structure

New York: A new crop of companies entering the US public markets, including such high-profile offerings as Facebook, are turning the clock back on the way US corporations are run.

Facebook, Groupon, LinkedIn, Zynga and others have put in place governance provisions that go against a long-term swing towards more shareholder-friendly rules.

One stark example of this reversal is in the number of companies that have classified or staggered boards, where only a handful of directors come up for election each year rather than all of them, making it hard for an activist investor or unwanted suitor to take control of the board through a proxy context.

Another is the creation of dual-class stock structures, which allow founders and early investors to gain greater voting control than their economic interest would otherwise suggest.

In the past ten years, many of the biggest publicly traded companies in the US have been getting rid of such provisions. Currently, for example, only about 24 per cent of S&P 500 companies have classified boards, down from 61 per cent in 2002, according to FactSet SharkRepellent.

But there hasn't been such a significant change among new arrivals. Of the 76 companies that went public last year, nearly 65 per cent had classified boards. In 2002, 82 per cent of IPOs had the feature.

Of the eight high-profile IPOs in the social networking and new media space last year, all either had classified boards or dual-class structures, with some having both. Of these companies, Zillow and LinkedIn had both, Angie's List, Jive Software and Pandora Media had classified boards, while Groupon, FriendFinder Networks and Zynga had dual-class structures.

Angie's List, Facebook, Groupon, Zillow and Zynga declined to comment. A spokesman for LinkedIn said: "We believe our corporate governance structure allows us to execute on our strategic plans, enabling us to maximise long term value for our company and our shareholders."

The other companies did not comment.

All white, all male

CalSTRS, a $145 billion (Dh532.5 billion) behemoth that invests the pension funds of California's more than 852,000 current and retired teachers, has already taken up some of its concerns with Facebook, sending a letter on Tuesday to chief executive Mark Zuckerberg that calls for increasing the size and diversity of its board.

Hester-Amey noted that Zuckerberg had a board that was all white, and all male, even though chief operating officer Sheryl Sandberg and a large portion of its users are women.

It is particularly surprising that Sandberg doesn't get a board seat despite being widely seen as hugely influential not only within Facebook but with advertisers and women in the wider business community — including starring at events like the World Economic Forum in Davos. She has also served on Starbucks Corp and Walt Disney Co boards.

As these newly public companies break from the trend of giving shareholders greater say, investors and corporate governance experts bemoan the lost lessons of past disasters — from Enron to Lehman Brothers — which they say at least partly resulted from boards and shareholders who wielded little power over management. But they also say there is not much investors can do about it.

Complete control

"These guys running tech companies are probably hyper paranoid," said Eric Jackson, founder of activist hedge fund Ironfire Capital. "But they have the power to insist on these kind of structures and control, and the markets are so far willing to still buy into the company," he said. "Until there is a real renouncement by investors of these structures through a lower share price they will continue to do this."

At Facebook, corporate governance provisions effectively give the 27-year-old Zuckerberg complete control, so much so the Harvard University drop-out even has the right to appoint his own successor before he dies. Zuckerberg, who benefits from Class B shares entitled to ten votes each, has also struck voting agreements with other shareholders. Altogether, he will control just under 57 per cent of the vote.

If Class B shareholders lose control of the majority of the voting power, the board will become staggered to give it an extra defence.

Another potential point of irritation for investors eyeing Facebook is the lack of influence they will have over a so-called evergreen equity incentive plan, through which the number of shares reserved for employees' stock awards automatically rise by up to 2.5 per cent every year through 2022.

Shoring up defences

While new companies are generally more likely to seek protections against corporate raiders and activist hedge funds, the extent of the barriers and some of the actions taken to shore up defences are being questioned, especially given the high-profile nature of some of the companies involved. It has some major investors feeling insulted.

"These are companies who for one reason or another decided that they are going public, but they do not want to have to answer to the public market," said Janice Hester-Amey, from the corporate governance unit at the California State Teachers' Retirement System. "The big issue is that you take money from the public market, and the reason that companies do this is so that they can acquire other companies..."