Microcap Board Governance: Less Independent, Less Diverse

Microcap Board Governance, a study conducted by Board Governance Research LLC commissioned by the Investor Responsibility Research Center Institute (IRRCi), examines microcap board governance at 160 companies. That represents about  ten percent of all companies with less than $300 million in market capitalization traded on major U.S. stock exchanges.

Most microcaps are not included in major indices. Many do not have analysts following their performance. As a result, microcap governance practices have not received the same level of scrutiny as larger capitalization companies. In fact, as I attend investor and director conferences, about the only one I hear frequently talking about microcap board governance is Adam J. Epstein, of Third Creek Advisors, LLC.

Microcap Board Governance: Free Webinar

Register for a webinar on Wednesday, August 22nd at 4:00 PM ET to review the findings. Leading the webinar I expect will be Jon Lukomnik, Executive Director
IRRC Institute, as well as Annalisa Barrett, Founder and CEO of Board Governance Research LLC.

The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors.   IRRCi recently selected the John L. Weinberg Center for Corporate Governance (Weinberg Center) at the University of Delaware as its successor organization

Board Governance Research LLC  provides independent research on corporate governance practices, board composition, and director demographics.

Microcap Board Governance: Key Findings

• Microcaps typically are not young, nor do they feature dual class stock. The vast majority (86 percent) of the study companies have been in existence for more than a decade. Also, few (seven percent) of the companies studied have multiple classes of stock and even fewer (four percent) have one shareholder controlling more than 50 percent of the common stock. These findings contradict common misconceptions that many microcap companies are early-stage growth companies or are controlled by founders or early funders.
• Microcap boards are less independent than larger corporations’ boards. Some 61 percent of microcap boards have fewer than 80 percent independent board members, compared to 51 percent of large companies. Also, while large cap and microcap boards are just as likely to have combined the roles of CEO and board chair, microcap companies are unlikely to have an independent lead director. 70 percent of such microcap companies have not named a lead director, despite that being considered best practice by most corporate governance experts.
• Microcap boards are less gender diverse. The majority (61 percent) of microcap companies have no female directors. By contrast, only 21 percent of the Russell 3000 boards have all male boards. Additionally, only 12 percent of the microcap companies have more than one female director, while nearly half (45 percent) of Russell 3000 companies have more than one female director.
• Microcap boards are smaller. The average microcap board has 6.9 directors, compared to 8.9 at larger companies. Nearly a quarter (22 percent) of microcaps have boards with five or fewer directors.

Microcap Board Governance: Quotables

According to Jon Lukomnik, IRRCi executive director;

Microcaps are an intriguing and often overlooked corner of the equity market. This report is a much-needed deep dive into the corporate governance of microcaps so investors can better understand the landscape. The findings contradict a number of microcap misconceptions. For example, these aren’t necessarily young companies with the founder at the helm. Instead, about one-quarter of microcaps have been public for less than five years and only 14 percent of microcap CEOs are the founders.

At the same time, the report suggests some paths microcap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board or to fail to establish the position of a lead independent director when there is a combined chair/CEO structure.

Said Annalisa Barrett, report author, chief executive officer and founder of Board Governance Research and clinical professor at the University of San Diego School of Business;

The smallest U.S. companies play an important role in our economy, so everyone has an interest in how they are governed. Investors, employees, customers and suppliers of these microcap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management.

I started going through the list of surveyed companies to find possible investment opportunities. Data on most is scarce. Investment is speculative. However, it looks like I will find about ten good opportunities. Once invested, I will no doubt agitate for better governance.

Microcap Board Governance: More Key Findings

• Only one in seven (14 percent) of the microcap CEOs studied are the founders of the companies they lead, contrasting the notion that many small companies are founder led start-ups.
• Only four percent of the microcap companies studied have a majority shareholder who owns 50 percent or more of shares.
• Director election standards differ. While the majority (54 percent) of Russell 3000 companies have adopted majority voting for director elections, only 11 percent of microcap companies have done so.
• Microcap directors may have less boardroom experience, as only 17 percent of them currently serve on the boards of other publicly-traded companies compared to 35 percent of Russell 3000 directors.
• Microcap boards have more variability in the number of board meetings held than do larger companies. More microcap boards (24 percent) held 12 or more meetings as compared to the 17 percent of the Russell 3000 boards which did so during the study year. On the other hand, microcap boards were also more likely (five percent) than Russell 3000 boards (two percent) to have held fewer than four meetings that year.
• The committee structures in place at microcap boards tend to be less complex than those of larger company boards. While the microcap boards studied are just as likely to have the three key committees (Audit, Compensation and Nominating/Governance) as the Russell 3000 boards, they are less likely to have additional committees. Further, many microcap board committees meet only once a year and some reported holding no meetings during the study year.