Corporate Governance at Silicon Valley Companies 2013

The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication, titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2013); the complete survey is available here.

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1] In this report, we present statistical information for a subset of the data we have collected over the years. These include:

  • makeup of board leadership
  • number of insider directors
  • gender diversity on boards of directors
  • size and number of meetings for boards and their primary committees
  • frequency and number of other standing committees
  • majority voting
  • board classification
  • use of a dual-class voting structure
  • frequency and coverage of executive officer and director stock ownership guidelines
  • frequency and number of shareholder proposals
  • number of executive officers

In each case, comparative data is presented for the S&P 100 companies and for the high technology and life science companies included in the SV 150, as well as trend information over the history of the survey. In a number of instances we also present data showing comparison of the top 15, top 50, middle 50 and bottom 50 companies of the SV 150 (in terms of revenue), [2] illustrating the impact of scale on the relevant governance practices.

Significant Findings

Governance practices and trends (or perceived trends) among the largest companies are generally presented as normative for all public companies. However, it is also somewhat axiomatic that corporate governance practices should be tailored to suit the circumstances of the individual company involved. Among the significant differences between the corporate governance practices of the SV 150 high technology and life science companies and the uniformly large public companies of the S&P 100 are:

  • The number of executive officers tends to be substantially lower in the SV 150 than in the S&P 100 (in the 2013 proxy season, average of 6.5 compared to 11.2). In both groups there has been a long-term, slow but steady decline in the average number of executive officers per company, as well as a narrowing in the range of the number of executive officers in each group. [3]
  • While there has been a general downward trend in both groups, the SV 150 companies continue to be substantially less likely to have a combined board chair/CEO than S&P 100 companies (in the 2013 proxy season, 37% compared to 72%). Where there is a separate chair, they are also substantially more likely to be a non-insider at SV 150 companies (in the 2013 proxy season, 69% compared to 21%). Lead directors are substantially more common among S&P 100 companies (in the 2013 proxy season, 85% compared to 44%).
  • The S&P 100 companies tend to have larger boards than SV 150 companies (average of 12.0 compared to average of 8.1 in the 2013 proxy season), and tend toward larger primary committees (audit, compensation and nominating). They are also substantially more likely to have other standing committees (83% of S&P 100 companies do, compared to 23% of SV 150 companies in the 2013 proxy season).
  • Female directors are substantially more common among S&P 100 companies whether measured in terms of average number of female directors (in the 2013 proxy season, 2.4 compared to 0.8) or in terms of average percentage of each board that are women (in the 2013 proxy season, 19.9% compared to 9.1%). While female board membership peaked among SV 150 companies in the 2008 proxy season (average of 12.3% compared to 17.2% for the S&P 100), the overall trend is clearly upward in both groups (compared to averages of 10.9% in the S&P 100 and 2.1% in the SV 150 in the 1996 proxy season). From the 1996 through 2013 proxy seasons, the percentage of companies with no women directors declined from 11% to 2% in the S&P 100 and 82% to 43% in the SV 150.
  • SV 150 companies continue to have more insiders as a percentage of the full board, while S&P 100 companies continue to have more insider directors measured in absolute numbers (while there has been and longer term downward trend in insiders, both groups have held essentially steady over the past five proxy seasons).
  • While there is a clear trend toward adoption of some form of majority voting in both groups, the rate of adoption is substantially higher among S&P 100 companies (92% compared to 44% of SV 150 companies in the 2013 proxy season), although it declined 5% from the 2011 proxy season (compared to a 7% increase for the SV 150).
  • Stock ownership guidelines for executive officers are substantially more common among S&P 100 companies (in the 2013 proxy season, 95% compared to 53%), although that is a substantial increase for both groups over the course of the survey (compared to 58% for the S&P 100 and 8% for the SV 150 in 2004), including a 9% increase in the SV 150 over the last year. Similar trends hold for stock ownership guidelines covering board members (although the S&P 100 percentage is about 20% lower for directors over the period of the survey).
  • While classified boards used to be similarly common among both groups (about 44% for S&P 100 and 47% for SV 150 in 2004), there has been a marked long-term decline in the rate of their use among S&P 100 companies but not among SV 150 companies (11% for S&P 100 compared to 45% for SV 150 in the 2013 proxy season). Our data shows that within the SV 150, the rate of adoption fairly closely tracks with the size of company (measured by revenue).
  • Stockholder activism, measured in the form of proposals included in the proxy statements of companies, continues to be substantially lower among the high technology and life science companies in the SV 150 than among S&P 100 companies (whether measured in terms of frequency of inclusion of any such proposals or in terms of number of proposals). However, over the last two proxy seasons, the largest companies in the SV 150 have closed the gap and are now comparable to the S&P 100 in terms of frequency of having a least one such proposal. [4]

The complete Fenwick & West 2013 Corporate Governance Practices Survey is available here.

Endnotes:

[1] Compared to the S&P 100, SV 150 companies are generally much smaller and younger, have lower revenue and are concentrated in the high technology and life science industries. The 2013 constituent companies of the SV 150 range from Apple and Hewlett-Packard (HP) with revenue of approximately $165B and $119B, respectively, to Zhone Technologies (Zhone) and Jive Software (Jive) with revenue of approximately $115M and $114M, respectively, in each case for the four quarters ended on or about December 31, 2012. HP went public in 1957, Apple in 1980, Zhone in 2001 and Jive in 2011. Apple and HP’s peers clearly include companies in the S&P 100, of which they are also constituent members (eight companies were constituents of both indices for the survey in the 2013 proxy season), where market capitalization averages approximately $98B. Zhone and Jive’s peers are smaller technology companies that went public over the last half decade or so and have market capitalizations well under $1B. In terms of number of employees, the SV 150 averages 8,500 employees, ranging from HP with 331,800 employees spread around the world in dozens of countries to companies such as Ubiquiti Networks with 150 employees in four countries, as of the end of their respective fiscal years 2012.
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[2] The top 15, top 50, middle 50 and bottom 50 companies of the SV 150, include companies with revenues in the following respective ranges: $5.4B or more, $1.2B or more, $270M but less than $1.1B, and $114M but less than $270M. The respective average market capitalizations of these groups are $87B, $34B, $2.2B and $866M.
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[3] The high technology and life science companies in the SV 150 moved from an average of 8.8, maximum of 20 and minimum of 4 in the 1996 proxy season to an average of 6.5, maximum of 14 (ignoring an outlier) and minimum of 2 in the 2013 proxy season. The S&P 100 companies moved from an average of 13.2, maximum of 41 and minimum of 5 in 1996 proxy season to an average of 11.2, maximum of 24 and minimum of 3 in the 2013 proxy season.
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[4] Among the high technology and life science companies in the top 15 of the SV 150 (all of which are of a scale similar to S&P 100 companies), only 73% had at least one stockholder proposal included in the company’s proxy statement for the 2013 proxy season(an increase from 43% in the 2011 proxy season and 53% in the 2012 proxy season), the average number of proposals (among those with any) was 2.2 (up from 2.0 in the 2012 proxy season, but the same as in the 2011 proxy season) and only three had four or more proposals during the 2013 proxy season (compared to 74% of S&P 100 companies with an average of 2.6 proposals and 20% having four or more proposals–overall substantially similar to the 2011 and 2012 proxy seasons).
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