Recently, the Investor Responsibility Research Center Institute (IRRCi) published a follow-up to its initial 2012 study on “controlled” companies, entitled “Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk.” A “controlled” company is one in which more than 50% of the voting power for the election of directors is held by an individual, a group or another company (Nasdaq Equity Rule 5615(c)(1) and NYSE Listed Company Manual §303A.00). The follow-up study analyzes the long-term performance and risk profiles of controlled companies in the S&P 1500 Composite Index as of July 31, 2015. Some key findings include:
- The number of controlled companies in the S&P 1500 decreased by 8% between 2012 and 2015.
- Nearly 70% of controlled companies operated in one of three sectors: Consumer Discretionary (40%), Industrials (16.2%) and Consumer Staples (12.4%).
- From 2005 to 2015, the average market cap of controlled companies increased from $8.3 billion to $20.6 billion.
- Controlled companies with multiple classes of stock underperformed compared to non-controlled companies with respect to total shareholder returns, revenue growth, return on equity and dividend payout rations. However, controlled companies outperformed non-controlled companies with respect to return on assets.
- Director tenures at controlled companies were longer than at non-controlled companies. The proportion of controlled companies where board members averaged at least 15 years of board service was more than 17% higher than at non-controlled companies. Almost 80% of controlled companies also had no new nominees on their boards – roughly 10% higher than at non-controlled companies.
- Women and minority directors were less common at controlled companies compared to non-controlled companies.
- A lower proportion of board members had financial expertise at controlled companies compared with non-controlled companies.
- Average CEO pay at controlled companies with a multi-class capital structure was three times higher (by approximately $7.2 million) than at single-class controlled companies and was more than 40% higher (by approximately $3.3 million) than at non-controlled companies.
The follow-up study references our recent survey of 580 emerging growth companies (“EGCs”) that completed IPOs between 2013 and 2015, entitled “Getting the Measure of EGC Corporate Governance Practices: A Survey and Related Resources.” The follow-up study found that IPOs of companies with multiple classes of voting stock has increased in absolute numbers but declined in percentage terms over the study period (2012-2015) and that the size of these offerings has soared and, as such, investors’ market exposure to their potential risks appears to be rising. In contrast, our EGC survey found that the percentage of EGC IPOs involving controlled companies declined slightly in 2015 (16.9%) compared to the period between 2013 and 2014 (17.1%) and the percentage of EGC IPOs involving multi-class capital structures increased in 2015 (18.1%) compared to the period between 2013 and 2014 (13.8%). In addition, the existence of a multi-class capital structure does not necessarily mean by itself that a company is controlled. There are other trends among EGCs (including controlled and non-controlled companies) that are generally beneficial for shareholders, such as a decrease in “super majority” shareholder voting provisions (71% in 2015 compared to 75% in 2013-2014), a decrease in provisions permitting shareholder action by written consent (25% in 2015 compared to 51% in 2013-2104), and an increase in separation of the CEO and Chairman positions (67% in 2015 compared to 60% in 2013-2104).
The IRRCi follow-up study is available at: http://irrcinstitute.org/wp-content/uploads/2016/03/Controlled-Companies-IRRCI-2015-FINAL-3-16-16.pdf.
Our EGC survey is available at: http://media.mofo.com/docs/pdf/150507-EGC-Survey/#?page=0.