1. Corporate Governance
Corporate governance is the set of processes that provides an assurance of a fair return to outside investors.
Resolve the conflict of interest between controlling (majority) and non-controlling (minority) shareholders.
Resolve the conflict of interest between CEO and outside shareholders.

2. Examples of conflict of interest between CEO and outside shareholders
Insufficient time and effort on building shareholder value
Excessive time and effort on pet project that does not create shareholder value
Inflated compensation or excessive perquisites
Manipulating financial results to increase bonus or stock price
Excessive risk taking to increase short-term results and bonus
Failure to groom successors so management is “indispensible”

3. Corporate governance is important for privately-held companies because
The IPO valuation will depend on how the market perceives the internal governance and the credibility of the financials.
The price an acquirer (either privately-held or publicly-held) will offer for a privately-held target will also depend on the internal governance and the credibility of the financials.
Succession planning: Builds confidence among employers, customers, and suppliers that even after the (sudden) departure of the current CEO, their implicit and explicit contracts with the company will be honored.

4. WSJ, February 3, 2014

5. Number of Owners in Privately Held Companies
and Frequency of Observing a Board
Number of Owners
Frequency of Board 11% 26% 49% 57% 60% 62%

6. Board Structure at the time of IPO
Venture-Backed Non-Venture-Backed
Average Board Size
% of Insiders on Board % 50.9%
% of Outsiders on Board 65.1% 42.9%
% of Boards with Fully Independent
Audit Committee % 37.1%
Compensation Committee 69.7% 26.6%
% of Companies where Chairman and
CEO are same % 72.7%

7. Board Structure and Life Cycle of the Private Company
Less Than 3 Years
3-6 Years
7-14 Years
More Than 14 Years
Governing Board
54%
74%
73%
80%
Advisory Board 4% 9%
16%
Both Boards
41%
22%
18%
Number of Outside Directors
2.4
2.1
2.9
4.1
Formal Board Evaluation 0%
14%
New Director Orientation
10%
28%
Strategy to Change Board Composition
42%
45%
36%
Percent of director compensation that is cash
39%
26%
60%
70%

8. Corporate Board Responsibilities
The board of directors has a dual mandate:
Advisory: counsel management regarding strategic and operational direction of the company.
Oversight: monitor management and company performance.
Effective boards satisfy both functions.
The responsibilities of the board are separate and distinct from those of management. The board does not manage the company.

9. Corporate Board Priorities
Introduction DCF Valuation Relative Valuation Real Option Valuation Conclusion
Corporate Board Priorities
NACD Survey of Private Companies
Top 3 Governance Priorities
59% Strategic planning and oversight
44% Corporate performance and valuation
25% Executive talent management and leadership development
24% Risk oversight
20% CEO succession
19% Financial oversight/ Internal controls
15% Board effectiveness
9% Relations with stakeholders/owners

10. NACD Survey of Private Companies
Introduction DCF Valuation Relative Valuation Real Option Valuation Conclusion
NACD Survey of Private Companies
Average Board Size
Less than $25 million
$25 million to $50 million
$50 million to $100 million
$100 million to $250 million 9.0

11. Board Independence Boards are expected to be independent:
Act solely in the interest of the firm.
Free from conflicts that compromise judgment.
Able to take positions in opposition to management.
“Independence” is defined according to regulatory standards.
However, independence standards may not be correlated with true independence.
Requires a careful evaluation of board member’s biography, experience, previous behavior, and relation to management.

12. Corporate Board Mechanics
Presided over by chairman: sets agenda, schedules meetings, coordinates actions of committees.
Decisions made by majority rule.
To inform decisions, board relies on materials prepared by management.
Periodically, independent directors meet outside presence of management (“executive sessions”).

13. Corporate Board Committees
Not all matters are deliberated by the full board. Some are delegated to subcommittees.
Committees may be standing or ad hoc, depending on the issue at hand.
All boards are required to have audit, compensation, nominating and governing committees.
On important matters, the recommendations of the committee are brought before the full board for a vote.

14. Corporate Board Committees
Introduction DCF Valuation Relative Valuation Real Option Valuation Conclusion
Corporate Board Committees
NACD Survey of Private Companies
Most Prevalent Committees on Boards
80% Audit
77% Compensation
49% Nominating
31% Executive
18% Finance
17% Strategic planning

15. Audit Committee Responsibilities of the audit committee include:
Oversight of financial reporting and disclosure
Monitor the choice of accounting policies
Oversight of external auditor
Oversight of regulatory compliance
Monitor internal control processes
Oversight of performance of internal audit function
Discuss risk management policies

16. Compensation Committee
Responsibilities of the compensation committee include:
Set the compensation for the CEO
Advise the CEO on compensation for other executive officers
Set performance-related goals for the CEO
Monitor the performance of the CEO relative to targets

17. Nominating and Governance Committee
Responsibilities of the nominating/governance committee include:
Identification of qualified individuals to serve on the board
Selection of nominees to be voted on by shareholders
Hiring consultants as necessary
Determine governance standards for the company
Manage the board evaluation process
Manage the CEO evaluation process

18. Director Term
Annual election: Directors are elected to one-year terms.
Staggered board: Directors are elected to three- year terms, with one-third of board standing for election each year.

19. Director Elections
In most companies, directors are elected on a one-share, one-vote basis.
Shareholders may withhold votes but not vote against.
Four main voting regimes:
Plurality: directors who receives most votes is elected, even if a majority is not obtained.
Majority: director must achieve majority to be elected, otherwise must tender resignation.
Cumulative: shareholders can pool votes, and apply to selected candidates (rather than one vote each).
Dual class: different classes of shares carry different voting rights (disproportionate to economic interest).
Typically, only one slate of directors is put forth for election; in a contested election, a dissident slate is also put forth.

20. Director’s Legal Obligations
The “duty of care” requires that directors make decisions with due deliberation.
The “duty of loyalty” requires that directors act “in the interest of the shareholders.”
The “duty of candor” requires that the board inform shareholders of all information that is important to their evaluation of the company.