New Study Identifies Key Corporate Governance Differences Between Microcap & Larger Companies

Microcap Boards Smaller, Less Independent and Less Diverse  

Microcap Study Stats: 22% of Boards Studied Have Five or Fewer Directors; 61% Have No Female Directors; and 70% of Companies with Combined CEO/Chair Have No Lead Director

Webinar to Review Findings on August 22nd at 4 PM ET

NEW YORK, NY, August 1, 2018 – A new in-depth analysis of micro-capitalization (microcap) public companies finds that the corporate governance of these companies with less than $300 million in market capitalization differs materially from that of their larger brethren.

The new study, Microcap Board Governance, conducted by Board Governance Research LLC and commissioned by the Investor Responsibility Research Center Institute (IRRCi), examines the governance practices at 160 microcap companies, representing approximately ten percent of all companies with less than $300 million in market capitalization traded on a major U.S. stock exchange.

Most of these microcaps are not included in major indices and many do not have analysts following their performance. Possibly as a result, microcap governance practices have not received the same level of scrutiny as larger capitalization companies.

Download the full study here. Register here for a webinar on Wednesday, August 22nd at 4:00 PM ET to review the findings.

Among the study’s key findings were:

  • Microcaps typically are not young, nor do they feature dual class stock. The vast majority (86 percent) of the study companies have been in existence for more than a decade. Also, few (seven percent) of the companies studied have multiple classes of stock and even fewer (four percent) have one shareholder controlling more than 50 percent of the common stock. These findings contradict common misconceptions that many microcap companies are early-stage growth companies or are controlled by founders or early funders.
  • Microcap boards are less independent than larger corporations’ boards. Some 61 percent of microcap boards have fewer than 80 percent independent board members, compared to 51 percent of large companies. Also, while large cap and microcap boards are just as likely to have combined the roles of CEO and board chair, microcap companies are unlikely to have an independent lead director in such circumstances — 70 percent of such microcap companies have not named a lead director, despite that being considered best practice.
  • Microcap boards are less gender diverse. The majority (61 percent) of microcap companies have no female directors. By contrast, only 21 percent of the Russell 3000 boards have all male boards. Additionally, only 12 percent of the microcap companies have more than one female director, while nearly half (45 percent) of Russell 3000 companies have more than one female director.
  • Microcap boards are smaller. The average microcap board has 6.9 directors, compared to 8.9 at larger companies. Nearly a quarter (22 percent) of microcaps have boards with five or fewer directors.

“Microcaps are an intriguing and often overlooked corner of the equity market,” said Jon Lukomnik, IRRCi executive director. “This report is a much-needed deep dive into the corporate governance of microcaps so investors can better understand the landscape. The findings contradict a number of microcap misconceptions. For example, these aren’t necessarily young companies with the founder at the helm. Instead, about one-quarter of microcaps have been public for less than five years and only 14 percent of microcap CEOs are the founders.”

Lukomnik added, “At the same time, the report suggests some paths microcap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board or to fail to establish the position of a lead independent director when there is a combined chair/CEO structure.”

“The smallest U.S. companies play an important role in our economy, so everyone has an interest in how they are governed,” said Annalisa Barrett, report author, chief executive officer and founder of Board Governance Research and clinical professor at the University of San Diego School of Business. “Investors, employees, customers and suppliers of these microcap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management,” Barrett explained.

Other key findings of the report include:

  • Only one in seven (14 percent) of the microcap CEOs studied are the founders of the companies they lead, contrasting the notion that many small companies are founder led start-ups.
  • Only four percent of the microcap companies studied have a majority shareholder who owns 50 percent or more of shares.
  • Director election standards differ. While the majority (54 percent) of Russell 3000 companies have adopted majority voting for director elections, only 11 percent of microcap companies have done so.
  • Microcap directors may have less boardroom experience, as only 17 percent of them currently serve on the boards of other publicly-traded companies compared to 35 percent of Russell 3000 directors.
  • Microcap boards have more variability in the number of board meetings held than do larger companies. More microcap boards (24 percent) held 12 or more meetings as compared to the 17 percent of the Russell 3000 boards which did so during the study year. On the other hand, microcap boards were also more likely (five percent) than Russell 3000 boards (two percent) to have held fewer than four meetings that year.
  • The committee structures in place at microcap boards tend to be less complex than those of larger company boards. While the microcap boards studied are just as likely to have the three key committees (Audit, Compensation and Nominating/Governance) as the Russell 3000 boards, they are less likely to have additional committees. Further, many microcap board committees meet only once a year and some reported holding no meetings during the study year.

The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors.  More information is available at www.irrcinstitute.org.

Board Governance Research LLC provides independent research on corporate governance practices, board composition, and director demographics.  For more information and to see the firm’s research on various corporate governance topics, please visit www.boardgovernanceresearch.com.

 

Media Contact:

Kelly Kenneally
Investor Responsibility Research Center Institute

+1.202.256.1445

kelly@irrcinstitute.org

###

 

New Study Identifies Key Corporate Governance Differences Between Microcap and Larger Companies

Microcap Boards Smaller, Less Independent and Less Diverse  

Microcap Study Stats: 22% of Boards Studied Have Five or Fewer Directors; 61% Have No Female Directors; and 70% of Companies with Combined CEO/Chair Have No Lead Director

Webinar to Review Findings on August 22nd at 4 PM ET

NEW YORK, NY, August 1, 2018 – A new in-depth analysis of micro-capitalization (microcap) public companies finds that the corporate governance of these companies with less than $300 million in market capitalization differs materially from that of their larger brethren.

The new study, Microcap Board Governance, conducted by Board Governance Research LLC and commissioned by the Investor Responsibility Research Center Institute (IRRCi), examines the governance practices at 160 microcap companies, representing approximately ten percent of all companies with less than $300 million in market capitalization traded on a major U.S. stock exchange.

Most of these microcaps are not included in major indices and many do not have analysts following their performance. Possibly as a result, microcap governance practices have not received the same level of scrutiny as larger capitalization companies.

Download the full study here. Register here for a webinar on Wednesday, August 22nd at 4:00 PM ET to review the findings.

Among the study’s key findings were:

  • Microcaps typically are not young, nor do they feature dual class stock. The vast majority (86 percent) of the study companies have been in existence for more than a decade. Also, few (seven percent) of the companies studied have multiple classes of stock and even fewer (four percent) have one shareholder controlling more than 50 percent of the common stock. These findings contradict common misconceptions that many microcap companies are early-stage growth companies or are controlled by founders or early funders.
  • Microcap boards are less independent than larger corporations’ boards. Some 61 percent of microcap boards have fewer than 80 percent independent board members, compared to 51 percent of large companies. Also, while large cap and microcap boards are just as likely to have combined the roles of CEO and board chair, microcap companies are unlikely to have an independent lead director in such circumstances — 70 percent of such microcap companies have not named a lead director, despite that being considered best practice.
  • Microcap boards are less gender diverse. The majority (61 percent) of microcap companies have no female directors. By contrast, only 21 percent of the Russell 3000 boards have all male boards. Additionally, only 12 percent of the microcap companies have more than one female director, while nearly half (45 percent) of Russell 3000 companies have more than one female director.
  • Microcap boards are smaller. The average microcap board has 6.9 directors, compared to 8.9 at larger companies. Nearly a quarter (22 percent) of microcaps have boards with five or fewer directors.

“Microcaps are an intriguing and often overlooked corner of the equity market,” said Jon Lukomnik, IRRCi executive director. “This report is a much-needed deep dive into the corporate governance of microcaps so investors can better understand the landscape. The findings contradict a number of microcap misconceptions. For example, these aren’t necessarily young companies with the founder at the helm. Instead, about one-quarter of microcaps have been public for less than five years and only 14 percent of microcap CEOs are the founders.”

Lukomnik added, “At the same time, the report suggests some paths microcap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board or to fail to establish the position of a lead independent director when there is a combined chair/CEO structure.”

“The smallest U.S. companies play an important role in our economy, so everyone has an interest in how they are governed,” said Annalisa Barrett, report author, chief executive officer and founder of Board Governance Research and clinical professor at the University of San Diego School of Business. “Investors, employees, customers and suppliers of these microcap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management,” Barrett explained.

Other key findings of the report include:

  • Only one in seven (14 percent) of the microcap CEOs studied are the founders of the companies they lead, contrasting the notion that many small companies are founder led start-ups.
  • Only four percent of the microcap companies studied have a majority shareholder who owns 50 percent or more of shares.
  • Director election standards differ. While the majority (54 percent) of Russell 3000 companies have adopted majority voting for director elections, only 11 percent of microcap companies have done so.
  • Microcap directors may have less boardroom experience, as only 17 percent of them currently serve on the boards of other publicly-traded companies compared to 35 percent of Russell 3000 directors.
  • Microcap boards have more variability in the number of board meetings held than do larger companies. More microcap boards (24 percent) held 12 or more meetings as compared to the 17 percent of the Russell 3000 boards which did so during the study year. On the other hand, microcap boards were also more likely (five percent) than Russell 3000 boards (two percent) to have held fewer than four meetings that year.
  • The committee structures in place at microcap boards tend to be less complex than those of larger company boards. While the microcap boards studied are just as likely to have the three key committees (Audit, Compensation and Nominating/Governance) as the Russell 3000 boards, they are less likely to have additional committees. Further, many microcap board committees meet only once a year and some reported holding no meetings during the study year.

The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors.  More information is available at www.irrcinstitute.org.

Board Governance Research LLC provides independent research on corporate governance practices, board composition, and director demographics.  For more information and to see the firm’s research on various corporate governance topics, please visit www.boardgovernanceresearch.com.

 

Media Contact:

Kelly Kenneally
Investor Responsibility Research Center Institute

+1.202.256.1445

kelly@irrcinstitute.org

###

 

Almost Three Quarters of Investment Professionals Use Environmental, Social & Governance Information When Making Investment Decisions

New CFA Institute survey highlights board accountability, human capital and executive compensation as important issues

Webinar on Wednesday, August 26th at 10 AM ET to Review Findings

NEW YORK, NY, August 17, 2015 – Almost three-quarters of investment professionals worldwide (73 percent) take environmental, social, and corporate governance (ESG) issues into consideration in the investment process, according to the CFA Institute ESG Survey, a new survey of CFA Institute members created by CFA Institute and the Investor Responsibility Research Center Institute (IRRC Institute). In addition, 64 percent of survey respondents consider governance issues, 50 percent consider environmental issues, and 49 percent consider social issues in investment decisions. Only 27 percent do not consider ESG issues.

“CFA Institute believes that every investment analyst should be able to identify and properly evaluate investment risks, and ESG issues are a part of this,” said Paul Smith, CFA, president and CEO, CFA Institute. “Our exam curriculum emphasizes risk management, and our members are increasingly interested in continuing education materials on ESG. This survey demonstrates how serious investment professionals are considering these issues and how practice and methodology are evolving.”

“Overall, the survey creates a robust data baseline for investors, companies and ESG data providers,” said Jon Lukomnik, IRRC Institute executive director. “But, most importantly, this survey digs deeper than the simple question of, ‘Is ESG important?’ The nuances are important and provide much needed insight on how investors and analysts actually use ESG data and what data is most relevant. For example, the survey findings not only tell us that investors generally want external assurance about ESG data, but also about the preferred level of assurance, and about how much investors are willing to pay for ESG assurances.”

Key survey findings are summarized in ESG Issues in Investing: Investors Debunk the Myths, and are highlighted below:

  • Risk evaluation: Sixty-three percent of survey respondents said they consider ESG in the investment decision making process to help manage investment risks, 44 percent say that their clients/investors demand it and 38 percent said ESG performance is a proxy for management quality.
  • Top three issues in decision-making: Survey respondents ranked board accountability, human capital, and executive compensation as the issues most important to investment analysis and decision-making.
  • Regional breakdown: A high proportion of CFA Institute members in the Asia-Pacific region considered ESG issues (78 percent), followed closely by members in the Europe, Middle East, and Africa (EMEA) region (74 percent). Respondents in the Americas region were the least likely to use ESG information in their decision-making process, but, even there, a solid majority (59 percent) do use ESG factors.
  • ESG integration in the investment process: Fifty-seven percent of respondents integrate ESG into the whole investment analysis and decision-making process, while 38 percent use best-in-class positive alignment; 36 percent use ESG analysis for exclusionary screening.
  • ESG disclosures: Sixty-one percent of survey respondents agreed that public companies should be required to report at least annually on a cohesive set of sustainability indicators in accordance with the most up-to-date reporting framework. In addition, 69 percent of these respondents say ESG disclosures should be subject to independent verification. Furthermore, of these, 44 percent believe that verification at a high level of assurance, similar to an audit, is necessary. Another 46 percent believe limited verification, or a lower level of assurance, is necessary. When this group was asked how much should be spent on independent verification, responses varied from 10 percent to 100 percent of the cost of an audit of financial statements.

Download CFA Institute ESG Survey here.

Download ESG Issues in Investing: Investors Debunk the Myths ESG Issues here.

Methodology

An online survey was conducted from 26 May to 5 June 2015. Some 1,325 members of CFA Institute who are portfolio managers or research analysts responded to the survey for a response rate of 3 percent. The margin of error for the survey was +/- 2.7 percent.

Regional Breakdown: 68 percent from Americas, 21 percent EMEA, 11 percent APAC.

Primary Asset Base: 41% primarily deal with institutional clients, 31 percent private clients, 16 percent both, and 12 percent not applicable.

These survey results will help inform a new CFA Institute ESG guide for investors, due to be published in late 2015.

Webinar

A webinar is scheduled for Wednesday, August 26, 2015, at 10:00 AM ET to review the findings. Register here or at https://attendee.gotowebinar.com/register/6575443840963984129.

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 132,000 members in 151 countries and territories, including 124,700 charterholders, and 145 member societies. For more information, visitwww.cfainstitute.org.

CFA Institute offers members and investors many resources on ESG issues to better educate themselves at www.cfainstitute.org/ESG. ESG reading materials are also included in the CFA Institute curriculum to ensure that the next generation of financial professionals understands current global investment practice. CFA believes that every financial analyst conducting investment analysis should have knowledge of the risks and opportunities of environmental, social, and governance (ESG) issues in investing.

The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research that enables investors, policymakers, and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased, and disseminated widely. More information is available at www.irrcinstitute.org.

IRRC Media Contact:
Kelly Kenneally
+1.202.256.1445 | kelly@irrcinstitute.org

CFA Institute Media Contact:
Alliccia Hernandez
+1.212.705.1739 | alliccia.hernandez@cfainstitute.org