Governance, Liquidity, and Employee Retention in an Era of Capital Abundance was the full title of last Thursday’s morning event sponsored by the Silicon Valley Directors Exchange and Stanford’s Rock Center for Corporate Governance. As billed, we were to hear
a panel of experts discuss the role of the board of directors in addressing challenges of governance, liquidity, and employee retention in an era of capital abundance. The discussion will cover trends in venture capital investments in private companies, including increased funding levels and the rising number of unicorns, the length of time companies are staying private (which is generally longer now than in the past), and exit strategy and valuation trends in acquisitions versus IPOs.
In addition, the panelists will debate the governance implications and the consequences for employees of companies staying private with relatively unlimited access to capital, including:
- potential management misconduct
- the effects of an immature governance structure combined with rapid growth, global expansion, and increased business complexity on culture and complianc
- employee morale and retention issues, an
- board and investor motivations for liquidity.
Governance, Liquidity, and Employee Retention: My Notes
I’m not your typical reporter. I go to events at Stanford because I think corporate governance is key to both improving the performance of my portfolio and changing the world. I am trying to move some of the levers through proxy proposals, working with other shareholders, writing, consulting, etc. See The Individual’s Role in Driving Corporate Governance in The Handbook of Board Governance. Here I am basically just sharing my notes, like I might have done with a fellow student 40 years ago.
I took notes on what I was most interested in and could have misinterpreted, so read at your own risk. This program, like all SVDX programs, was subject to Chatham House Rules. The panel started with some general highlights familiar to many.
SOX made it more expensive to go public. On the other hand, private equity funding has vastly increased over the several years.
40% of VC goes through Silicon Valley. The pace of 2017 is set to surpass 2016. Companies are staying private much longer. There is very robust innovation. Companies like Alphabet are setting up their own venture funds. Many more $100M rounds are occurring in early stages. In 2013-14 more asset classes began to join. Softbank will invest $20B a year in nonpublic companies.
The cost of building the culture is usually higher and more difficult than raising the capital. Companies are spending to capture markets and technology but are frequently hemorrhaging money. Are incentives properly aligned?
Everyone used to be in a hurry to go public but that is no longer true. The pool of private VC backed companies tripled over 13 years. $120B VC-backed in Bay Area.
Companies now typically hold many more fundraising liquidity events for the company and its employees before going public.
Tender offers for employees mean employees have options. They can stay longer. They can also cash out some early equity and move to another startup. One of many strategies suggested that made sense to me was to have liquidity events on a routine basis. That way, employees will not feel that taking chips off the table is a now or never event. Maybe they can cash out a minimum amount or wait another year when they really will need the money.
If companies take too much off the table through private tender offers, companies are more likely to implode. One panelist tries to set limits of 5-10% of their stock.
At many events, panelists wait to answer questions until brief presentations are over. That makes sense because the answer to someone’s burning question may be coming right up. At this session, questions came early… were asked and answered. It worked very well and gave the session a very intimate, interactive feel. I hope more moderators and panelists follow suit in the future, although this may have worked so well because the audience made great comments and asked great questions.
As I recall, one of the first questions was not so much about Governance, Liquidity, and Employee Retention but more about culture. Of course, it is all related.
Opinions and styles among panelists varied. One professed to be old fashioned, wanting employees to spend more time in the office to benefit from creative ideas and reminders that arise when employee interact on a face-to-face basis.
However, the same panelist recognized that commutes are so long and difficult, it is not practical to enforce mandatory attendance at the corporate workplace. Additionally, they caved to employee desires that vending machines should dispense the goods without the need for payments from employees. That sure does not sound old fashioned to me.
Culture can also be defined more around the purpose of company. It has to be meaningful, especially for millennials. Millennials want to be more involved, so move them around a lot. Standup desks, helping employees with their causes… those small things seem to help. Try to have an open work environment where people are criticized and open to feedback, without feeling the need to get all defensive.
Accoutrements vs tone of high performance and efficiency. Incentives may look at 2-year cycles so employee can move on to the next company. The most successful companies are also the most innovative companies. Early investors are noses in whereas those investing later are less likely to be that familiar with the corporate culture.
Another panelist discussed Steve Jobs experience helping to design the office layout at Pixar. Common spaces and functions were moved to the center of the building to facilitate lots of chance interactions. I once worked in a similar space in a very long building with only a few floors. Design really helped cross-fertilization, although only for the functions collocated by floor, since in our case each floor had its own common spaces.
Public investors are much more concerned with money spent for culture if productivity isn’t there. They need to see a path to profitability… especially when companies go public. One of the side effects of having companies stay private longer is more investors stay on the board for longer. Maybe some then lack industry expertise?
Equity ranges are relatively stable but cash needs are now higher. The employee base is much higher. Silicon Valley companies had a $10,000 burn rate for employees in 2001; now it is more like $25,000 a year. Employees need a lot more money to live in Silicon Valley.
One company moved most of it’s engineering abroad… bringing back some of the top talent to the US through H-1B visas. Yes, you will have lower productivity from overseas but it is so much less expensive that it us usually worth it.
Boards should be more involved than just through board meetings. Attend trainings, lunches, etc. Reviewing CEO is a 360-degree process. Asked about how to handle cultural issues as a board member – First take the issue to the CEO. Don’t circumvent the CEO (unless they are the issue). Generally work through management.
Governance, Liquidity, and Employee Retention: Also of Interest
The Jumpstart Our Business Startups Act, or JOBS Act, is causing initial public offerings to leave cash on the table, according to new research, because fewer mandatory disclosures create wary investors that demand bigger post-IPO share price pops…
All three measures of underpricing—market-adjusted stock returns based on the offer price and the closing price on the day of the IPO, the closing price on the day after the IPO, and the closing price 30 trading days after the IPO—are larger for emerging growth companies…
So why aren’t these companies complaining? The study says that’s because EGC executives are benefitting from lower levels of disclosure in other ways – including lower priced IPO equity awards & reduced comp disclosure. (IPOs: JOBS Act Leading to Underpricing?)
Governance, Liquidity, and Employee Retention: Program Contacts
Amanda K. Packel – Managing Director, Rock Center for Corporate Governance at Stanford University, Co-Director, Stanford Directors’ College
Kim Le – CEO, Silicon Valley Diretors’ Exchange (SVDX)