US firms going public give investors short shrift

A new crop of companies entering the US public markets, including such high-profile offerings as Facebook, are turning the clock back on the way US corporations are run.

Facebook, Groupon Inc, LinkedIn Corp, Zynga Inc and others have put in place governance provisions that go against a long-term swing towards more shareholder-friendly rules.

One stark example of this reversal is in the number of companies that have classified or staggered boards, where only a handful of directors come up for election each year rather than all of them, making it hard for an activist investor or unwanted suitor to take control of the board through a proxy contest. Another is the creation of dual-class stock structures, which allow founders and early investors to gain greater voting control than their economic interest would otherwise suggest.

In the past 10 years, many of the biggest publicly traded companies in the US have been getting rid of such provisions. Currently, for example, only about 24 per cent of S&P 500 companies have classified boards, down from 61 per cent in 2002, according to FactSet SharkRepellent.

But there hasn’t been such a significant change among new arrivals. Of the 76 companies that went public last year, nearly 65 per cent had classified boards. In 2002, 82 per cent of IPOs had the feature.

Of the eight high-profile IPOs in the social networking and new media space last year, all either had classified boards or dual-class structures, with some having both.
Of these companies, Zillow Inc and LinkedIn had both, Angie’s List Inc, Jive Software Inc and Pandora Media Inc had classified boards, while Groupon, FriendFinder Networks Inc and Zynga had dual-class structures.

While new companies are generally more likely to seek protections against corporate raiders and activist hedge funds, the extent of barriers and some of the actions taken to shore up defenses are being questioned, especially given the high-profile nature of some of the companies involved.

It has some major investors feeling disused. CalSTRS, a $145 billion behemoth that invests the pension funds of California’s more than 852,000 current and retired teachers, has already taken up some of its concerns with Facebook, sending a letter to Chief Executive Mark Zuckerberg that calls for increasing the size and diversity of its board.

As these newly public companies break from the trend of giving shareholders greater say, investors and corporate governance experts bemoan the lost lessons of past disasters — from Enron to Lehman Brothers — which they say at least partly resulted from boards and shareholders who wielded little power over management.

But they also say there is not much investors can do about it. As many as 26 companies, or roughly one-third of those that went public last year, according to IPO Pay Reporter data. There are other blockages being set up too.

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