January 2016

In This Issue

Why private companies should look into valuations, The differences between private and public company boards, and private company governance appointments and news.

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Featured Articles

Want to be a Corporate Director? Understand the Differences Between Private and Public Company Boards

By Stan Silverman

[Editor's note: this article originally appeared in the Philadelphia Business Journal and has been republished with permission of the Philadelphia Business Journal.]

On Dec. 7, I spoke about the path to becoming an independent director of a private or public company at a National Association of Corporate Directors conference. An independent director is one who meets the definition of independence, which means that the individual is not an employee of the company and has no familial ties to management, among other criteria.

I have been a trustee or director on the boards of nonprofit organizations, private companies, private equity companies and public companies. I have also held the position of CEO of a private company, and the chairman of the board of a nonprofit. I would like to share my perspectives on serving on these types of boards.

For those who desire to become an independent corporate director of a private or public company, a common first step is to join the board of a nonprofit organization. This is an opportunity to learn about the board governance process, the fiduciary responsibilities of a director, the areas under the purview of the board, and that the job of a director is governance and not operations, which is the responsibility of the CEO.

Serving on a nonprofit board also provides an opportunity to learn about how to be an effective director or trustee, how to have your opinions effectively heard and how to make influential arguments on issues. It is also an opportunity to network with individuals who could support your candidacy as a director for a private or public company board.

There are a number of differences between public, private and private equity company boards:

Public Company Boards

Public companies are owned by institutional as well as private investors. Public company boards have a formal board process, with significant time spent on satisfying the complex regulatory requirements of a public company. These requirements include the review and approval of quarterly (10Q) and annual (10K) financial reports, as well as annual proxy statements that disclose to investors the details of operations, financial results and executive compensation.

Analysts who follow a public company opine on its prospects as an investment and make buy/sell recommendations to investors. They also issue estimates on quarterly earnings. If a company does not achieve these quarterly earnings estimates, it can have an adverse impact on the company’s stock price. This places an emphasis on quarterly earnings versus earnings growth over the long-term.

Public companies are under the scrutiny of the SEC as well as investor advisory services, which advise institutional investors on the quality of the board governance process (for example, investor advisory services prefer that the role of chairman and CEO not be held by the same individual), and issue a report card regarding the governance practices of the company. The reports of investor advisory services and their recommendations can impact how shareholders vote for a company’s directors.

Private Company Boards

These companies are owned by private individuals, often family members who have an interest in building long-term shareholder value for eventual sale of the company or to pass to the next generation of family members.
Private company stock is not traded on public markets and therefore private companies do not face the scrutiny that public companies face by the SEC, investment analysts and investor advisory services. The time that public company directors spend in dealing with this scrutiny can be spent by private company directors on discussion, approval and oversight of the company’s objectives and strategies that are developed and implemented by management.

Private Equity Company Boards

On private equity company boards, the directors usually are also significant investors. My experience on these boards is that the directors and the CEO are financial partners mainly focused on strategies to increase shareholder value. Their time horizon is much shorter than that of a private company or public company. As in the case of private companies, the time not spent on compliance required by public companies can be spent on the company’s objectives and strategies.
Private equity companies acquire firms with the goal of using their resources and specific expertise to increase the firm’s value. Unlike public company firms whose operating metric is earnings, the primary operating metric of a private equity acquired firm is cash flow which is measured by EBITDA (earnings before interest taxes depreciation and amortization). Their focus is to increase the EBITDA and increase the company’s growth potential from what it was before they acquired the firm, so that it can be sold for an EBITDA multiple higher than the multiple they paid for it.

Whether you serve on a nonprofit, public, private or private equity company board, all directors need to be concerned about liability exposure. Directors must practice the duty of care and duty of loyalty, which are basic obligations. Don’t join a board unless adequate D&O (directors and officers) insurance is in place.

Directors serving on public company boards face relatively larger liability exposure due to the nature of scrutiny and risks associated with public companies. For example, directors of a public company who decide to sell it invariably will be sued, regardless of the merits of the case for allegedly not following a proper and thoughtful decision-making process, or for not negotiating a sufficiently high premium over the market price of the shares before the sale was announced. These suits are usually settled, but do require the time and attention of the directors of the company.

Board service is a rewarding experience and provides an opportunity to develop valuable skills. It expands your network. It provides an opportunity to be an effective leader on certain issues, and be a follower on others. It also provides an opportunity to be exposed to businesses and business issues you normally would not be exposed to, which is an enriching experience. For those of you who are serving in a senior leadership position at your company, serving on a board will help you be more effective in your job.

 


Stan Silverman is the founder and CEO of Silverman Leadership. He is a writer and speaker, advising c-suite executives about leadership issues and on cultivating a leadership culture within their organizations. Stan is Vice Chairman of the Board of Drexel University and a director of Ben Franklin Technology Partners, Friends Select School and Faith in the Future. He is the former President and CEO of PQ Corporation.

Click here for the full article.

Why Private Companies Should Look Into Valuations

By Larry Van Kirk

Larry Van Kirk, managing director of Valuation Research Corporation, recently spoke to Private Company Director and provided information on valuation of private companies. Below are his answers to a Q&A interview:

Why should a private company board consider a valuation of the company?

From my perspective as both a valuation professional and as someone who has served on a number of closely held boards, valuations are regularly needed. The most common driver of a valuation is the sale or purchase of company equity. Internal stock transactions -- when stock is being transferred from one executive to others -- as well as any incentive compensation plans also usually trigger valuations. I’ve seen valuations become part of a detailed strategic planning process when management is seeking to make a significant strategic move and would like to analyze how that move might affect the company’s valuation. The triggers are numerous, and we are increasingly seeing boards take very seriously their fiduciary obligation to scrutinize valuations.

If the company is considering a sale process, when should a board seek a fairness opinion or an independent valuation?

The answer to this question is nuanced. It requires an examination of the relationships of the parties and whether the sale could become controversial or contentious. 

If it is a sale with multiple bidders and a high degree of confidence in the sale process and pricing, then an outside fairness opinion may not be necessary. If there is the potential for controversy, a fairness opinion or at least an independent valuation is prudent. For example, if there is only one interested buyer and no other bidders, the fairness opinion might provide a higher level of confidence that the price is appropriate and offers an outside view without the escalation of risk. The relevant rule that addresses fiduciary issues including procedures, liability, and disclosures is Rule 2290 as published by FINRA and approved by the SEC.

Do internal transactions or incentive compensation for key executives cause a need for a valuation?

Yes, valuations of internal stock transactions or stock incentive compensation programs are required to meet both tax and financial reporting requirements. The relevant rule, ASC 718, addresses the financial reporting of stock compensation. The tax reporting requirements generally surround documentation and support for Section 409a of the Internal Revenue Code, often called the cheap stock rule, which governs reporting related to non-qualified stock compensation. While it is important for board members to understand these value derivations and indications, they are also important for compensation or audit subcommittees. 

Does a valuation enable the board to evaluate the impact of management policies?

After performing a standard valuation, we are often asked to speak to the board to discuss the drivers of value and steps that could enhance value. For example, if the board is considering an expenditure for a new piece of equipment, it may want to consider the impact on cash flow and, ultimately, value. So the valuation process and a thorough discussion can help inform the board whether their investments are just a revenue enhancer or a value enhancer.

We sometimes see companies that are divided by an older, more conservative generation and a younger generation seeking to pursue more growth. In other words, the older generation doesn’t necessarily want to invest while the younger generation wants to spend more and take some risks. We are asked to consider the valuation implications of a more growth-oriented/risk-tolerant philosophy and what it might mean for the valuation of the company.

 


Larry Van Kirk, managing director of Valuation Research Corporation, is a practice leader for valuations of closely held companies and valuations related to financial reporting. He also specializes in the valuation of business enterprises and intellectual property and financial opinions of fairness, solvency and capital adequacy.

Click here for the full article.
 

Registration is now open for the fourth annual Private Company Governance Summit, May 11-13, 2016 in Washington, DC.​

Session topics include:

  • The Board’s Role in a Crisis
  • Dealing with Conflicts of Interest on Private Company Boards
  • How to Interview Director Candidates
  • Cybersecurity and the Private Board
  • Preparing for the Board Meeting
  • Private Company Capitalization, Liquidity and Shareholder Return

Expert briefings on:

  • The IPO/M&A-ready Board
  • Onboarding independent/non-family directors
  • Board liability and risk
  • Board strategy
  • Board diversity
  • The dynamics of family members on the board
  • Private board committees
  • Director and board evaluations
  • The board’s role in talent oversight and development

Click here to learn more.

 

DIRECTOR APPOINTMENTS

Click here for more director appointments.
 

Other Perspectives

Douglas K. Chia Appointed New Executive Director of The Conference Board Governance Center

The Conference Board announced that Douglas K. Chia will join The Conference Board as Executive Director of The Conference Board Governance Center, effective February 2016, according to a press release.

In this role, Mr. Chia will lead the Center in its work in the public interest to provide organizations with knowledge and thought leadership on key issues of corporate governance. He is replacing Donna Dabney, who is retiring.

The Governance Center of The Conference Board serves as a resource for objective, nonpartisan, corporate governance thought leadership and research. It is a platform for investors and business leaders to engage and share good governance practices that generate corporate performance and trust.

Read the full press release here.

Kohl’s Looking into Options to Go Private

Kohl’s Corp. is looking into options to take the company private with shares down 40%, according to a Wall Street Journal article.

Kohl’s, which has about 1,200 stores nationwide, is planning to hire an investment banker to look into options, which could include selling to a private equity firm. Online sales and other competition have contributed to the company’s issues, as well as rising apparel costs and declining gross margin.

The company’s shares are down 40% from their high of $79.07 on April 2. It ended last week with a market value of $9 billion, or roughly half its expected annual sales for the current fiscal year, according to the article.

 
Click here for more news.