Saturday, October 22, 2011

Primary capital market corporate governance in the US needs tweaking?

The Dealbook reports a potential primary market corporate governance loophole in the United States. In a recent piece, Deal Professor Steven Davidoff flags off concerns to this effect pointing to the "locked-in" staggered board provision (that may only be repealed with a 80% vote-- a very high threshold to beat) in the constitutional documents of LinkedIn as exhibit A that go with dual class shares as part of its capital structure. This is because proxy advisory services like the ISS dont rate companies' corporate governance at the IPO stage, and because subscribers to the IPO subscribe only to flip their shares at the listing and could not care enough to monitor it's corporate governance.

It could be argued though, that the corporate governance risk that these issuers present is likely already priced into the cost of capital for them and that LinkedIn stock was bid for at the IPO at a slight discount to its fair value to account for this latent risk. This is likely an empirical question and we may receive some guidance from comparing the costs of capital for issuers like LinkedIn having "anti-corporate governance" clauses in their charter documents, with peer group companies not having such clauses to see if the investors apply any "corporate governance discount". If they do, then the risk is priced in and the regulators need not care. If the difference is negligible though, we may have to think of appropriate policy responses.