Beyond Shareholder Value Corporate Governance and Corporate Venturing Erik P.M. Vermeulen Beyond Shareholder Value Corporate Governance, Innovation and Long-Term Growth Erik P.M. Vermeulen 1
Shareholder return over 17 years: average annual growth of 35% At one point he invited Arthur Levitt, the former SEC chairman, to become a board member But then Jobs read a speech Levitt had given about corporate governance, which argued that boards should play a strong and independent role, and he telephoned to withdraw the invitation. 2
Amazon: value increase by US$111 billion 1997 Letter to 3
30-01-13 Chairman 1994; CEO 1996 Jeffrey P. Bezos Since 1996 1996-2010 1997-2002 Since 1997 Tom A. Alberg John Doerr Scott Cook Stonesifer 4
Corporate Governance: The Traditional View Current Focus: Principal-Agent Problem Dispersed Ownership Control of managerial misbehaviour How to align the interest of shareholders and managers? Supervisory Board Board of Directors Non-executive directors/ executive directors Managers Employees Creditors Customers Society 5
Current Focus: Principal-Agent Problem Dispersed Ownership Controlling Shareholder (Straightforward: Single Class of Shares) Controlling Shareholder (Control- Enhancing Mechanisms) Control of managerial misbehaviour How to align the interest of shareholders and managers? Supervisory Board Board of Directors Non-executive directors/ executive directors Managers Employees Creditors Customers Society Current Focus: Principal-Agent Problem Dispersed Ownership Controlling Shareholder (Straightforward: Single Class of Shares) Controlling Shareholder (Control- Enhancing Mechanisms) Control of managerial misbehaviour Related Party Transactions How to align the interest of shareholders and managers? Supervisory Board Board of Directors Non-executive directors/ executive directors Exploiting corporate opportunities Managers Employees Creditors Customers Society 6
Customers Workers Customers Workers Workers Customers Corporate Governance Experts (Proxy Advisors, Academics, Corporate Educators, Regulators): (1) Small boards are better; (2) More independent directors are better; (3) Independent Chairmen are better; (4) Gender diversity is crucial; (5) Corporate Governance measures to engage long-term shareholders/investors (remuneration; related party transactions); (6) One-share-one-vote but single class controlled companies perform better (7)Result: one-size-fits-all approach 7
Corporate Governance: Value Destruction 8
Minority More Agency-based Research Minority Principal Agent Problem Principal Agent Problem Principal Agent Problem Minority Control More Stringent (and Detailed) Rules & Regulations Control Control More Agency-based Education 9
Minority More Agency-based Research Minority Principal Agent Problem Focus on DISCLOSURE Principal Agent Problem Principal Agent Problem Minority Focus on pre-defined onesize-fits-all structures Control More Stringent (and Detailed) Rules & Regulations Control Control More Agency-based Education Minority Minority Compliance Costs Cost of Capital Principal Agent Problem $ Principal Agent Problem Principal Agent Problem Disruptive Effect on: (1) Corporate Culture Control (II) Board Dynamics Control (III) Trust 10
30-01-13 Lawrence J. Ellison: Tech moguls like Larry Page, Sergey Brin and Mark Zuckerberg run public companies that are essentially private fiefdoms they ve structured their corporate control so there s no way that investors or board members can unseat them. Thank Steve Jobs for that Google, LinkedIn, Zynga and other tech companies have adopted dual-class voting structures that allow the founders to resist the pressure to produce short-term results ControlledCompaniesintheStandard&Poor s1500: A"Ten"Year"Performance"and"Risk"Review" October2012 The worst are those with total protection from shareholder pressure, who deliver the lowest returns for the highest risks 11
Emerging High Growth Companies The Future of Corporate Governance 12
Entrepreneurship and Innovation in Listed Companies: What is the Role of Corporate Governance? One-Size-Does-Not-Fit-All Boards can create an entrepreneurial environment: Tone at the Top Corporate Governance should focus on Board Dynamics Boards should consider attending investor conferences Corporate Governance: Value Creation 13
Corporate Life Cycle Revenue Non-listed Listed Cash flow Early stage Growth Pre-seed EUR 0.1M Seed EUR 0.5/1M Start-up EUR 1/5M Growth EUR 5/25M IPO EUR 25/150M Established Expansion Mature Proof of concept Patent Own capital 3Fs Government Business angels Incubators/ accelerators Local venture capital/family offices Business plan Prototype Company creation Team in place Product development Market introduction (International) Venture capital Staff growth Sales traction Corporate structure Marketing and sales investment Pre-seed EUR 0.1M Proof of concept Patent Corporate Life Cycle Corporate Governance: Contractual Seed EUR 0.5/1M Business plan Prototype Company creation Early stage Own capital 3Fs Government Business angels Incubators/ accelerators Local venture capital/family offices Start-up EUR 1/5M Team in place Product development Market introduction Non-listed Growth Growth EUR 5/25M (International) Venture capital Staff growth Sales traction Listed IPO EUR 25/150M Corporate structure Marketing and sales investment Corporate Governance: Flexibility Established Expansion Revenue Cash flow Corporate Governance:? Mature 14
70 Companies 41 Positive VC-Backed IPOs 2011 1H 2012 US Stock Exchange 59 Negative IPO Performance (%) - 31 December 2012 Employees: 90,482 Age of Companies: Average: 10 years Oldest: 21 years Youngest: 2 years Clean Technology 8% Semiconductors 6% Services 10% Other 9% Biotechnology 20% Internet 20% IT Services 3% Medical 4% Software 20% What Explains Poor IPO Performance? Questions about future growth Lower than expected results Lock-up Expiration 0 5 10 15 20 25 15
What Explains Poor IPO Performance? Questions about future growth Lower than expected results Lock-up Expiration 0 5 10 15 20 25 Number of Conferences 45 Governance Lesson - 1 Getting invited to Investor Conferences 40 35 30 IT Services Internet Software Medical Biotechnology Services Semiconductors Clean Technology Other Lineair (Software) 25 20 15 Average = One every three months 10 5 0 0 5 10 15 20 25 Months since IPO 16
Governance Lesson - 1 Getting invited to Investor Conferences 6000000 More Trading Volume 20 Equity Research Coverage 70 Dealing with Short Interest 18 5000000 IT Services Software Internet Medical 16 60 4000000 Biotechnology Semiconductors Other Services Clean Technology 14 50 12 40 3000000 10 30 8 2000000 6 20 1000000 4 10 2 0 0 5 10 15 0 0 0 2 4 6 8 10 12 14 Frequency 0 2 4 6 8 10 12 14 Governance Lesson - 2 Board Composition Founder=CEO-Chairman Average IPO Performance: +16 Founder=CEO Average IPO Performance: +9 Founder=Chairman Average IPO Performance: +37 Founder=Board Average IPO Performance: +3 Founders=Left Average IPO Performance: -38-150 -100-50 0 50 100 150 200 250 300 350 400 IPO Performance 31 December 2012 17
Governance Lesson - 2 Board Composition Independent Directors 100 90 80 70 60 50 40 30 20 10 Board Size: Average: 8 Max: 12 Min: 5 IPO Performance 31 December 2012 0-150 -100-50 0 50 100 150 200 250 300 350 400 IT Services Internet Software Medical Biotechnology Services Semiconductors Clean Technology Other Governance Lesson - 3 Board Composition VCs as Independent Directors 80 70 Approx. 30% react by appointing new directors 60 50 40 30 20 10 IT Services Internet Software Medical Biotechnology Services Semiconductors Clean Technology Other 0-150 -100-50 0 50 100 150 200 250 300 350 400 IPO Performance 31 December 2012 18
Pre-seed EUR 0.1M Proof of concept Patent Corporate Life Cycle Corporate Governance: Contractual Seed EUR 0.5/1M Business plan Prototype Company creation Early stage Own capital 3Fs Government Business angels Incubators/ accelerators Local venture capital/family offices Start-up EUR 1/5M Team in place Product development Market introduction Non-listed Growth Growth EUR 5/25M (International) Venture capital Staff growth Sales traction Listed IPO EUR 25/150M Corporate structure Marketing and sales investment Corporate Governance: Flexibility Established Expansion Revenue Cash flow Corporate Governance:? Mature 50 Companies* Global FT 500 Companies 2009-2012 Market Value Increase 2009-2012 Job Creation 2009-2012: 788,173 Age of Companies: Average: 66 years Oldest: 175 years Youngest: 8 years Automobiles 4% Media 4% Other 13% Pharma 17% Tabacco 4% * Excluding Natural Resources Companies and Financial Institutions Food/ Beverages 13% Hardware 12% Telecom 13% Software 10% Industrials 4% Retailers 6% 19
Governance Lesson - 1 Getting invited to Investor Conferences Ownership Structure Widely Dispersed 69% Dual Class 4% Controlled 27% Investor Conferences In 2012 Average: 6 Max: 34 Min: 0 20
Governance Lesson - 2 Board Composition Chair = Independent 19% Chair = Insider 19% Chair = CEO 50% Chair = Former CEO 12% Governance Lesson - 3 Board Composition Board Size Independent Directors Average: 13 Max: 20 Min: 7 Independent 70% Insiders 30% 21
Governance Lesson - 4 Who Are the Independent Directors? Dataset Widely Dispersed General 50% Investors 10% "Watchdogs" Finance 16% Business Related 24% General 48% Investors 12% "Watchdogs" Finance 15% Business Related 25% Time on the Board Average: 7,5 years Average Max: 18 (Max. 43 Comcast) Conclusion Will Success Spoil the Corporate Governance Discussion? The Future: More Emphasis on the Human Factor, Trust & Dynamics 22
Thank you e.p.m.vermeulen@tilburguniversity.edu 23