Enhancing Share Price with Superior Investor Protection
15 Pages Posted: 4 May 2002
Date Written: March 26 2002
This paper considers techniques of providing shareholders with superior investor protection in start up firms to reduce the cost of raising equity and/or for maximising the share price after an IPO. Various approaches are considered for embedding into corporate constitutions the separation of powers introduced by a shareholders agreement with a venture capitalist or the Associates of a LBO. Shareholder agreements typically limit changes in ownership, board composition, and the application of cash that also limits strategic direction in a way similar to the conditions found in negative pledge loan covenants that were responsible for the development of audit committees. Audit committees were created to protect directors not shareholders and changing banking practices exacerbate the false comfort that they provide investors.
The paper identifies how superior investor protection can be achieved with appropriate changes in the constitution of firms to create a watchdog board elected in parallel with the operating board. Supervisory boards can also act as watchdogs but they have a vertical relationship to the shareholders, as it is they who appoint the operating board. Described and compared are parallel watchdog boards used by the author for two start-ups, a Corporate Governance Board (CGB) proposed in the Australian Parliament for IPOs and a "Conflict board" described by a US legal scholar. The Corporate Senate established by the author for one start up company provided the role model for the CGB elected on a democratic basis of one vote per shareholder in parallel with the plutocratic election of directors by one vote per share and/or director. Corporate Senates do not need any changes to be made in corporate law or stock exchange listing rules.
An active dominant shareholder acts in effect as a supervisory board as found in Europe. As the majority of publicly traded companies around the world have an active dominant shareholder, publicly traded firms governed by more than one board are a common phenomena however it is a neglected topic of research. Multiple boards can introduce operating advantages in a similar way as achieved by unitary controlled firms decomposing decision making labour by adopting a multi-divisional form.
The paper concludes that the requirement by stock exchanges that audit committees be a condition for a company to be publicly traded be replaced by the establishment of a democratically elected watchdog board along the lines of a Corporate Senate.
Keywords: Corporate Governance, Corporate Senate, Dual board, IPO, Shareholder protection, Venture capital, Watch dog board
JEL Classification: D74, G38, K29
Suggested Citation: Suggested Citation