Corporate Governance Survey—2014 Proxy Season Results

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]

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:

• 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 (10% for S&P 100 compared to 47% for SV 150 in the 2014 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), with the top 15 companies having rates very similar to their S&P 100 peers.
• Anecdotally, it has been suggested that there is a recent trend toward dual-class voting structures among Silicon Valley companies. To the extent that this is a trend, it is now beginning to appear in our data (7.3% in the 2013 and 2014 proxy seasons after ranging approximately 2-4% prior to the 2012 proxy season).
• 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 (67% for the top 15 of the SV 150 compared to 80% for the S&P 100 in the 2014 proxy season), and where proposals are included the average number of such proposals included for the SV 150 is similar to the S&P 100 (2.6 compared to 2.4 in the 2014 proxy season). [2]
• The number of executive officers tends to be substantially lower in the SV 150 than in the S&P 100 (in the 2014 proxy season, average of 6.4 compared to 10.9). 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, which continued in the 2014 proxy season. [3]
• The S&P 100 companies tend to have larger boards than SV 150 companies (average of 12.1 compared to average of 8.1 in the 2014 proxy season), and tend toward larger primary committees (audit, compensation and nominating). They are also substantially more likely to have other standing committees (82% of S&P 100 companies do, compared to 30% of SV 150 companies in the 2014 proxy season).
• SV 150 companies continue to have more insiders as a percentage of the full board (largely as a result of having smaller boards), 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 six proxy seasons).
• The SV 150 companies continue to be substantially less likely to have a combined board chair/CEO than S&P 100 companies (in the 2014 proxy season, 36% compared to 69%), though there has been a general downward trend in both groups that continued in the 2014 proxy season. Where there is a board chair separate from the CEO, they are also substantially more likely to be a non-insider at SV 150 companies (in the 2014 proxy season, 71% compared to 52%)—though the S&P 100 increased markedly in the 2014 proxy season. Lead directors continue to be substantially more common among S&P 100 companies (in the 2014 proxy season, 81% compared to 45%)—though this is almost entirely a result of the boards of SV 150 companies more frequently having independent chairs. For the 2014 proxy season, 98% of SV 150 companies had an independent chair or a lead independent director, while the same was true of 97% of S&P 100 companies.
• Women directors are substantially more common among S&P 100 companies (in the 2014 proxy season, 21.0% compared to 10% in terms of average percentage of each board that are women). While board membership for women 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 2014 proxy seasons, the percentage of companies with no women directors declined from 11% to none in the S&P 100 and 82% to 38% in the SV 150.
• 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 47% of SV 150 companies in the 2014 proxy season), although it declined 5% from the 2011 proxy season (compared to an 11% increase for the SV 150).
• Stock ownership guidelines for executive officers are substantially more common among S&P 100 companies (in the 2014 proxy season, 95% compared to 53%). Both groups held essentially steady in the 2014 proxy season, although there has been a substantial increase for both groups over the course of the survey (from 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 15% lower for directors over the period of the survey, while the SV 150 has averaged 3% higher for directors compared to officers in recent years).

Complete Coverage

In this report, we present statistical information for a subset of the data we have collected over eleven 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), [4] illustrating the impact of company size or scale on the relevant governance practices.

The complete Fenwick & West 2014 Corporate Governance Survey is available here.

Endnotes:

[1] The S&P 100 is a cross‑section of companies across industries, but is not a cross‑section of companies across all size ranges (it represents the largest companies in the United States). While the SV 150 is made up of the largest public companies in Silicon Valley by one measure—revenue, it is actually a fairly broad cross‑section of companies by size, but is limited to the technology and life science companies based in Silicon Valley. Compared to the S&P 100, SV 150 companies are generally much smaller and younger, have lower revenue. The 2014 constituent companies of the SV 150 range from Apple and Hewlett-Packard (HP) with revenue of approximately $174B and $112B, respectively, to Pericom Semiconductor (Pericom) and Nimble Storage (Nimble) with revenue of approximately $127M and $126M, respectively, in each case for the four quarters ended on or about December 31, 2013. HP went public in 1957, Apple in 1980, Pericom in 1997 and Nimble in 2013. Apple and HP’s peers clearly include companies in the S&P 100, of which they are also constituent members (nine companies were constituents of both indices for the survey in the 2014 proxy season). Pericom and Nimble’s peers are smaller technology companies that went public more recently and have market capitalizations well under $5B. In terms of number of employees, the SV 150 averages 8,772 employees, ranging from HP with 317,500 employees spread around the world in dozens of countries to companies such as Ubiquiti Networks with 183 employees in five countries, as of the end of their respective fiscal years 2013. The S&P 100 averages 134,000 employees, including Wal‑Mart with 2.2 million employees in more than two dozen countries at its most recent fiscal year-end.
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[2] 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 67% had at least one stockholder proposal included in the company’s proxy statement for the 2014 proxy season (a decrease from 73% in the 2013 proxy season, but 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 2.8 (up from 2.1 in the 2013 proxy season), and 20% had four or more proposals during the 2014 proxy season (compared to 80% of S&P 100 companies with an average of 2.4 proposals and 20% having four or more proposals—overall substantially similar to the 2011—2013 proxy seasons).
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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 18 and minimum of 4 in the 1996 proxy season to an average of 6.4, maximum of 13 and minimum of 2 in the 2014 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 10.9, maximum of 23 and minimum of 3 in the 2014 proxy season.
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[4] The top 15, top 50, middle 50 and bottom 50 companies of the SV 150, include companies with revenue in the following respective ranges: $6.2B or more, $1.4B or more, $315M but less than $1.3B, and $126M but less than $314M. The respective average market capitalizations of these groups are $118B, $44B, $3.1B and $1.6B.
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