Governance best practices in public markets

As private companies approach the public market, key corporate governance best practices can help pave a path to stronger relationships with public-market investors and long-term shareholder alignment. Much like building a company to this stage, establishing a robust governance culture requires time, hard work, and a focus on prioritizing what matters most. In our view, evolving regulations and market expectations make these practices increasingly important to both company valuations and sustainable access to financial capital. We aim to provide firsthand insights from both our public and private investors to help our portfolio companies understand and get ahead of shifting governance requirements as they prepare for IPOs.

Shareholder rights

Shareholder rights are significant inputs into a company’s governance analysis. We encourage portfolio companies to proactively adopt the below best practices over time. While we typically engage on these topics rather than vote against the board, some other public-market asset managers may enforce more stringent voting policies. For a summary of large public investors’ policies, please review our Governance Guide for Private Companies.

• Voting power. We believe voting power should be equal to shareholders’ economic stakes, with one vote per share as the appropriate standard. Our belief aligns with market practice, with approximately 90% of all US public companies using single-class voting.¹ However, we understand that some founders want to maintain control during the pivotal early years of being public and recognize that a growing proportion of companies are choosing to IPO with multiple-class share structures. Between 2021 and 2024, the number of newly public companies with unequal voting rights rose from 21% to 24%.² Where these share structures exist, we encourage a vote-to-share ratio of no more than 10:1 and a time-based sunset provision to convert shares over time, preferably less than seven years from the date of the IPO. We also prefer a majority voting standard for amending bylaws or approving proposals.
• Annual election of directors and compensation plan. We believe that shareholders’ ability to elect directors and assess how executives are being paid are two of the most important shareholder rights. Allowing for an annual election of directors and approval of their executive compensation plans increases accountability. We believe companies that maintain a staggered (also known as a classified) board and/or less-than-annual “say-on-pay” frequency should adopt a time-based sunset provision, ideally phasing out the practice(s) over a reasonable period of three to seven years from the IPO.
• Election of directors by a majority of shareholder votes cast. In our view, the election of directors by a majority of votes cast is the appropriate standard, and governance is less favorable where plurality voting standards are in place. 
• Receptivity to shareholder feedback. We view it negatively when directors appear to disregard shareholder feedback through the voting process, such as failure to implement shareholder proposals that have received majority support, reelection of directors receiving less than a majority of votes, or adoption of poison pills without shareholder approval. 

Board composition

In our view, businesses create shareholder value by appointing directors who foster healthy debate in the boardroom, develop constructive relationships with management, and bring an array of relevant skills and experience. This requires boards to elect highly qualified directors who contribute insights from a broad range of perspectives. We understand that board composition is a complex topic and use the below considerations as a starting place in our analysis.

• Diversity of thought and experience in the boardroom. While we cannot know the variety of views each director currently brings to the boardroom, we generally believe no board should be comprised of directors who all share the same background, experience, and personal characteristics (e.g., gender, race, ethnicity, and age). We encourage companies to disclose the diverse attributes of their board and communicate their strategies and goals for fostering a diverse board. Where we feel a company board lacks diversity, we may choose to vote against the chair (or a member) of the committee responsible for director nominations.
• Independent oversight. Independent voices in the boardroom are necessary to ensure appropriate management oversight. In our view, two-thirds of directors should be independent at US companies. We favor separate CEO and chair roles and an independent chair as the preferred structure for board leadership to help ensure objective evaluation and compensation of top management. We believe key committees, especially the chairs, should be independent, and may vote against nominating committee chairs (or members) where we feel independent oversight is lacking. Failing the presence of an independent chair, we think a strong lead independent director is imperative. 
• Director engagement and commitments. Directors represent us as shareholders, and we may vote against any director who risks being insufficiently engaged with their board-related responsibilities. This tends to manifest as:
  
  • Insufficient engagement: Directors who fail to attend at least 75% of meetings, or
  • “Overboarding”: Director overcommitment, which we define as any executive who sits on three or more public company boards (including their own), or a nonexecutive who sits on five or more public company boards. We consider the chair of the board and the chair of the audit committee as an additional full-time board seat when evaluating if a director is overboarded. We may also take into consideration that certain director seats, such as those on Special Purpose Acquisition Companies (SPACs), may be less demanding. 

Executive compensation

Management incentives are a key element in long-term value creation and play a vital role in strategy setting, decision making, and risk management. While design and structure vary widely, we believe effective compensation plans attract and retain high-caliber executives, foster a culture of performance and accountability, and align management’s interests with those of long-term shareholders. Due to each firm’s unique circumstances, we evaluate plans on a case-by-case basis. At a high level, we look for: alignment of pay and performance evaluated as pay versus annualized total shareholder return over a three- to five-year period; transparency of metrics, targets, time frames and use of discretion; and a balanced mix of awards, preferably closely tied to long-term performance with a significant percentage of compensation at risk.

When evaluating executive pay, we generally ask three key questions:

1. Is executive compensation aligned with company performance?
2. Is executive compensation reasonable considering the company’s size, industry, and circumstances?
3. Does the compensation plan incentivize appropriate behavior?

We believe there are a common set of attributes that can help investors answer these questions and assess a company’s pay-for-performance strategy:

• Quantum of pay – The total amount executives are paid.
• At-risk pay – The percentage of total pay that requires executives to meet additional criteria.
• At-risk pay incentive timing – The proportions of total at-risk pay that are based on short-term incentives (STIs, usually requiring one year to realize) versus long-term incentives (LTIs, usually requiring three years or longer).
• Incentive types – The format in which STIs and LTIs are awarded to management (cash or equity) and the criteria on which they are awarded (e.g., performance objectives, time of service, etc.).
• Incentive alignment – How effective the chosen incentive types and timing are at driving performance for the business and its shareholders.
• Pay plan features – Other pay plan characteristics such as perquisites, tax gross-ups, or share repricing that may change the way or the amount that executives are compensated. 

Bottom line

Strong corporate governance is critical to every business but can specifically help private companies better prepare to transition to public markets. Throughout the governance journey, transparency is crucial to building trust with shareholders. “Good” governance is not universally defined, but we believe early incorporation of broadly applicable best practices better positions companies for long-term success. We aim to be a partner to our portfolio companies in these efforts, providing differentiated private-market-specific resources informed by our public-market investment perspective as they consider the next steps in their governance evolution.