Board Composition from a Buy-Side Perspective


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In this latest update from the Nasdaq Amplify program, we engaged Third Creek Advisors to provide insight into institutional investor perspectives of small-cap company board composition.

By Adam J. Epstein   |    NASDAQ MarketInsite   |    May 2016

According to Activist Insight, 73 percent of shareholder activist campaigns in 2015 were waged against companies with market capitalizations below $2 billion, and nearly 50 percent involved companies with equity values below $250 million. More than half of these activist overtures involved corporate governance issues, and companies acceded to activist demands nearly 70 percent of the time. Small-cap corporate governance – and particularly board composition – has been thrust into a spotlight that won’t soon fade.

In assessing the efficacy of corporate governance, companies should consider the institutional investor viewpoint. Their starting point in analyzing any board of directors is its composition; that is, does the board have the right people around the table to effectively oversee management. Experienced investors know that board composition is inextricably linked to shareholder value. Institutional investors analyze board composition through a unique lens, and small-cap officers and directors should consider adjusting their apertures accordingly.

Independent vs. objective. Experienced investors have learned that not every independent director is sufficiently objective to represent shareholder interests in a boardroom. Investors place a premium on board members who lack personal or professional relationships with other officers and directors because they are more likely to elevate long-term value creation above all else.

Threshold test. Every company has a handful of strategic imperatives, impediments to achieving those objectives, and customers for their goods and services. If you list each of the salient goals, risks, and stakeholder perspectives down the left side of a page and then list each director’s background down the right side of the page, institutional investors gauge the degree to which the two sides match. Where material gaps exist, red flags are raised.

Tenure. Though there are no definitive rules about how long is too long for a director to serve on a board, institutional investors tend to analyze director tenures on a sliding scale. That is, the longer a board member has served the more objective and uniquely qualified they should be. The level of scrutiny rises for directors who have served on a board for more than ten years. Interestingly, the United Kingdom’s Governance Code assumes that board members are no longer independent after serving on a board for nine years.

Ask any institutional investor and they will tell you that even companies with aptly composed boards often do a poor job of communicating that to investors. Officers and directors should treat the annual proxy as an invaluable opportunity to take ownership of this narrative, and to set forth in plain English why the company believes its board composition benefits shareholders.





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A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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