September 18, 2019

Governance Might Affect IPO Pricing After All

We’ve questioned whether institutional investors would ever be so concerned about a unicorn’s governance structure that they would pass on an IPO investment. Amid the plummeting expectations for the “We Company’s” valuation, this NYT article suggests investors may have found their limit. The company has made a few change in response – and this WSJ article says that all the fuss has even led to postponing the roadshow that was expected to occur this week.

Of course, another headline could be, “Investors Finding Their Limit With Unprofitable Companies,” but in this case, an overly optimistic valuation combined with things like trying to give founder & CEO Adam Nuemann extra voting rights into the afterlife just went too far. Here’s an excerpt from the NYT article describing the amended Form S-1 that the company filed last Friday:

The business would appoint a lead independent director and bar any member of Mr. Neumann’s family from the board. The special class of stock that Mr. Neumann owns will now have 10 votes per share, down from 20. Should he die or become permanently disabled, those shares will have only one vote apiece. Even so, Mr. Neumann will control a majority of shareholder votes after the change.

The board will also have the ability to choose Mr. Neumann’s successor; previously, succession was left to a three-person committee that included his wife, Rebekah.

And remember the concerns about the company’s related party transactions? There were a few changes there too:

And Mr. Neumann has pledged to give back any profits he makes from leasing properties to the We Company, transactions that prospective investors had highlighted as potential conflicts of interest.

Board Gender Diversity: Giving Credit Ratings a Lift?

A recent Moody’s study of over 1100 companies found a positive relationship between board gender diversity and credit ratings – but since the analysis didn’t examine other factors that might be affecting credit quality, it doesn’t prove causation. Here’s an excerpt:

The variance in board gender diversity is particularly evident at both ends of the rating spectrum. For instance, the five Aaa-rated companies in our cohort have the highest level of gender diversity on their boards, with women accounting for an average of 28% of their corporate directors. Women generally make up about a quarter of the boards of companies rated Baa1 or higher, with gender diversity largely declining by rating category to less than 5% for our two Ca-rated companies.

The study also points out that diversity mandates – while not common – might cause short-term business risks through board turnover, which could potentially create short-term credit risk:

For North American companies almost 75% would have to add at least one woman by the end of 2021. High levels of board turnover could signal a material change in corporate strategy or financial policies.While these changes could be both credit positive or credit negative, we tend to view the uncertainty as credit negative.

Board Gender Diversity: Russell 3000 Passes the 20% Milestone

For the first time ever, more than 20% of Russell 3000 board seats are occupied by women. That’s according to this Equilar announcement, which highlights the momentum in this area since Equilar first began publishing its quarterly “Gender Diversity Index” in 2017.

Liz Dunshee