The majority of companies in the United States are small cap, defined as companies below $500 million in market capitalization. While they are rich in ingenuity, small-cap companies have unique challenges that can be daunting for any board to manage. With smaller staffs and fewer resources than their large-cap counterparts, the time and talents of company executives are spread thin in the face of pressure for fast growth in an uncertain economic environment. This July, NACD, in partnership with Epsen Fuller Group, Fenwick & West, and Latham & Watkins held its second Small-Cap Forum. Over the course of a day, a collective of experts helmed six sessions at San Francisco’s Four Seasons Hotel to dissect the directors’ role in helping to build their companies. The following are three themes that emerged from the presentations:
Plan ahead. Many small-cap companies make the mistake of placing too much emphasis on budgeting. Innovation rarely, if ever, emerges from evaluating figures. Shift gears to take a close, hard look at your company and think about creating a strategic plan. A plan should ideally map out the next five years of the company—no fewer than three—and determine what resources are needed to meet those goals. Allot plenty of time outside of regular meetings to discuss various game plans, setting milestones to review the strategy.
Work with the founder. When assessing and building out the company’s long-term goals, the board also needs to pay attention to management. Small-cap companies often have a culture centered on the founder/CEO, and while that person’s innovative and entrepreneurial drive may have been enough to give legs to a nascent business, those skills may not be aligned with the firm’s needs and goals in subsequent stages of growth. That said, the board shouldn’t write off the leadership already in place. Building support around the C-suite can help enable the CEO to succeed in an increasingly expanding role, or to step down with dignity if required. By extension, start looking within the company for talent that can take the reins in the next three to five years. Broaching this topic can be highly sensitive; however, the longer a leadership gap exists at the CEO level in a small-cap environment, the greater the risk of a succession crisis.
Mind the gaps. The purpose of board-level committees is to share the workload so that board members can effectively “divide and conquer”; however, small-cap boards are traditionally half the size of a large-cap company—so small that the same directors frequently serve on multiple committees. Stretching resources this thin means that there is zero room for non-contributing directors, or else the board runs the risk of being unable to carry out its responsibilities effectively. Small-cap boards should create a skills matrix that charts each director’s areas of expertise—and reveals where the board’s collective knowledge base may be lacking.
A small-cap board should also put forth the effort to bridge the gap between the company and its shareholders. Any opportunity to engage with and better understand your shareholder base is a good idea, and is a particular imperative in the small-company environment where ownership may be more concentrated. Also realize that many small-cap boards become targets of activist investors. Prepare for those interactions not only by doing due diligence on activists’ investment styles and track records, but also by being willing to listen to the activists’ points of view.
Look for a full recap of the Small-Cap Forum in the September/October 2014 issue of NACD Directorship magazine.
As NACD works with corporate directors of public, private, and nonprofit boards to oversee and ensure the long-term sustainability of the enterprise and bolster investor confidence, I am frequently asked: “What companies have the most significant challenges?” While unique challenges certainly exist across boards of all company types, many view the roles of small-cap public company boards to be quite challenging.
These unique challenges span time and effort (workload) requirements, compensation, talent, financing, regulation, risk, strategy, competition, and internal resources, just to name a few. Small-cap directors and governance professionals may identify and prioritize the unique challenges of these companies differently, however, but one thing remains constant and that is that small-cap companies represent the majority of companies listed on U.S. exchanges, and the long-term prosperity of these small-cap companies is essential to a growing, thriving economy.
So where can small-cap company directors turn to reinforce their strategic agility?
Second, I highly recommend that all directors read NACD’s Board Building white paper, another high-impact, quick read. Most important in this resource is the skill set matrix enclosed in the appendix. Many companies are now using the skill set matrix to both determine and articulate the experiences and talents required for their future strategies.
Lastly, I suggest that current and aspiring small-cap directors attend NACD’s Small-Cap Forum on April 10 in San Antonio or on July 17 in San Francisco. Both sessions will focus on current and emerging issues facing small-cap boards, and these interactive events will include a range of interactive, peer-to-peer networking opportunities for robust dialogue.
Contact me at hstoever@NACDonline.org if you have specific questions or suggestions on how NACD can assist you, your board, and other small-cap directors advance exemplary board leadership.
While legislation—such as the Jumpstart Our Business Startups Act (JOBS Act) and Sarbanes-Oxley (SOX)—has eased some of the burdens small companies face when looking to go public, many of these companies now face the challenge of establishing effective governance structures. Limited resources and smaller staffs can lead to blurred lines between operations and oversight. Additionally, recruiting the right talent can also be difficult since small-cap companies may compete against their larger peers for talent.
Recognizing that small-cap directors have a need for specific corporate governance resources, the National Association of Corporate Directors (NACD) developed the NACD Small-Cap Forums exclusive for small- and micro-cap company directors. The forums—held on April 10 in San Antonio and on July 17 in San Francisco—feature seasoned directors from small-cap companies and subject-matter experts on financing and capital markets and board building.
The keynote speaker is Adam Epstein, founding principal of Third Creek Advisors, lead director of OCZ Technology Group Inc., and author of “The Perfect Corporate Board: A Handbook for Mastering the Unique Challenges of Small-Cap Companies.”
Topics to be addressed include strategy and risk, board-shareholder communications, and shareholder activism. To view the full agenda or to register, visit http://bit.ly/1i5NcBu.