The surge of unicorns is a key driver of the effort.
Back in the day, corporate honchos and executive headhunters offering advice to public company board member wannabes frequently would counsel an easy start with private company director service. Those days are rapidly ending — along with the validity of that advice. Earlier this year, the Securities and Exchange Commission (SEC) signaled its intention to force more transparency from big private companies. If the past is prologue, the definition of “big,” as measured by revenue, is certain to descend in coming years as regulation and enforcement inevitably trickle down.
Although the fuel for this fire seems to be the rapid growth of private companies with valuations of $1 billion or more — crossing 1,000 in February from just a bit over 500 the previous year — increasing regulatory pressure and sentiment from Europe and elsewhere also is driving the train of greater accountability. In remarks made last October, SEC Commissioner Allison Herren Lee described unicorns as “new, but no longer rare or mythical, kinds of businesses.” In today’s markets, Lee continued, “companies can and do stay private far longer than ever before, despite the fact that they often dwarf their public counterparts in size and influence.”
In a recent corporate governance update from law firm Wachtell, Lipton, Rosen & Katz, titled “The SEC Takes Aim at the Public-Private Disclosure Gap,” partner David A. Katz and consulting attorney Laura A. McIntosh note that the SEC “appears likely to embark on a rulemaking process that would require ESG — or, more accurately EESG (employee, environmental, social and governance) — disclosures from large private companies.”
Regulatory action in this area, the authors note, is gaining momentum globally, but not without some pushback. “It may well be the case that factors including political pressure, a worldwide focus on environmental and climate issues, and the blurring of the traditional line between the general public and the investing community make such regulation all but inevitable. And to be fair, the largest private companies — some with valuations in the tens of billions of dollars — undeniably have a significant public impact. Yet, it is also fair for U.S. market participants to question whether the SEC is the legitimate proponent of such regulation, and, further, to debate the scope and extent of what would constitute reasonable and tailored disclosure requirements for private companies.”
A year ago, with the effects of climate change a growing hot button for many constituencies, Lee asked, “What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?” Answers to questions like this are the tip of the iceberg in regard to areas of disclosure and compliance that regulatory agencies seek to oversee.
At the same time, Lee posed two corollaries: “How should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets?” and stating, “We should also consider the broader array of ESG disclosure issues; that means working toward a comprehensive ESG disclosure framework.” In other words, Katz and McIntosh opine, Lee “views public company climate disclosures as a starting point, intended to expand in two dimensions: to include private companies and to include EESG topics beyond climate change.”
In our pulse survey last month, when asked to list a dozen board-level topics in order of importance, our Directors to Watch ranked creating metrics to homogenize and measure ESG efforts right in the middle, followed by more specific climate change and environmental sustainability issues. They placed the expanding scope of private company director duties second from the bottom of the pile.
What is clear is that the nature of private company director service is becoming more demanding, complex and time-consuming. The days when serving on the board of a private entity was considered a soft stepping-stone to “the big leagues” are well and truly over and, in time, there may cease to be any relevant differences between signing up for the critical role of advising management and protecting stakeholders.