The Under $300 Million Market Cap Class
Posted by Laura Anthony, Esq. on April 04, 2019
The Under $300 Million Market Cap Class- Russell 500- The under $300 million class tends to have smaller boards (five or less) than larger companies (nine or more). Men dominate the boards in this class even more so than in larger companies. The majority (61%) of the under $300 million market cap companies studied have no female directors serving on their boards, compared to less than one-quarter (21%) of the Russell 3000 boards. Furthermore, only 12% of these companies have more than one female director, while nearly half (45%) of the Russell 3000 companies have more than one female director.
Not surprisingly, the under $300 million class pays their CEO’s less than larger companies (with as much shareholder scrutiny), though the average CEO age (in their 50’s) is the same for other classes of public companies. Directors are also paid much less than their larger cap counterparties, with the average being $90,000 for the under $300 million class and $180,000 for serving on a Russell 3000 company.
With smaller boards come fewer independent directors, more variability in the number and timing of meetings, and a less complex committee structure with many electing not to appoint a chairman of the board. In a period of shareholder activism and socially motivated investing, the board composition of the under $300 million class could be a hindrance to some institutional investments. In reading this study, I see an opportunity for these companies to stand out from the average by putting more attention into their board composition as well as governance and process.
To further illustrate the importance of these factors, on February 6, 2019, the SEC issued two new identical C&DI related to disclosure of board diversity, and in particular:
Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?
Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees. To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.
As with all public companies, the majority of the under $300 million class is incorporated in Delaware (59%) followed by Nevada (16%) and Maryland (7%). I note that as you move up the chain, Delaware comprises a larger and larger percentage of all public companies.
Not surprisingly, a greater majority of these companies tend to be owned by management and insiders than the larger companies. Management tends to face greater and greater dilution as a company grows and continues to access capital markets for financing or issues equity for mergers and acquisitions and employee stock grants. Also, the control ownership of this group tends to be in straight common stock, with only 7% of the companies examined having a dual stock class structure.