Gordon Gekko and Governing Small-Caps


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Few who have seen it can forget the iconic scene from the movie Wall Street when Michael Douglas’s character Gordon Gekko stands up, microphone in hand, at Teldar Paper’s shareholder meeting and says: “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works.” Cinematic legend. What if it’s also the key to better small-cap corporate governance?

Those exclusively ensconced in the mid- and large-cap governance ecosystems often proudly proclaim that the days of boards predominantly being comprised of “friends of the CEO” are in the rear-view mirror. Conversely, those who spend time in the vast majority of public company boardrooms – those of micro- and small-cap companies – know differently. That is, myriad boards are still handpicked by CEOs, governance standards propagated by Nasdaq and NYSE notwithstanding.

Has governance at smaller public companies improved since the Enron-era scandals, and in the wake of Sarbanes-Oxley and Dodd-Frank? The short answer is: a bit.

Institutional investors know that more often than not the boardroom efficacy of any given small-cap company is a reflection of the CEO’s personal opinion regarding corporate governance. Look behind the curtain of a well-governed small-cap company and you will likely find a CEO who values it. The opposite is also true.

Institutional investors regularly lament that many micro- and small-cap CEOs seem to view corporate governance as an expensive, form-over-substance, time-consuming, necessary evil that adds little value.

Contrast that widespread perception with the fact that the largest institutional investors spend fortunes on analyzing corporate governance in their portfolio companies. Put differently, those who manage trillions of dollars believe that better governed companies will put more money in their clients’ pockets, yet scores of micro- and small-cap CEOs appear to believe that corporate governance is a waste of time.

If this seems confounding – it is.

Before discussing what can be done to bridge this value-destroying chasm, first a few thoughts about how this could be the status quo in the first place.

Founder’s syndrome

Many small public companies are inextricably linked to their founders. Those founders rarely lack confidence, and often feel like they, themselves, are uniquely suited to guide the company forwards (perhaps quite rightly sometimes, by the way). In other words, visionaries require unimpeded views of the future, so all “non-visionaries” should best stay out of the line of sight.

Self-fulfilling prophecy

When CEOs intuitively feel like they benefit little from supervision, they install board members who will default to “oversight-lite.” Corporate governance is reduced to a tautology.

Regulations and activism

Entrepreneurs are often entrepreneurs because they are independently minded, and revel in upsetting the apple cart. It’s not surprising that they aren’t keen on Congress, stock exchanges, or hedge funds trying to tell them how to do that.   The more rigorous oversight is foisted upon small-cap CEOs, the more it is reviled.

Perhaps the path to more committed, fulsome small-cap corporate governance lies in the carrot, not the stick? What if small-cap CEOs were to, first, acknowledge, then embrace, what large asset managers all know; public companies overseen by artfully composed, courageous, engaged, truly objective boards of directors tend to make more money?

What if the elephant in the boardroom… is the board?

I tested out this “carrot” at an investor conference, where I shared the stage for a panel discussion with NACD’s Steve Walker, and CamberView’s Peter Michelsen in front of predominantly micro-cap CEOs. It went over with a resounding thud. Or so I thought.

Over the weeks subsequent to the conference, I received numerous phone calls from CEOs in attendance. One of them said he was chagrined to admit that he’d never once thought that more effective governance would put more money in his pocket. Another had a similar comment, and poignantly conceded that it’s impossible to square his view with BlackRock’s extensive analysis of portfolio company governance.

Maybe a little greed is what’s required to change the paradigm once and for all; i.e., “if better governance is going to financially benefit me (the CEO) and my shareholders, then sign me up!” Probably not Gordon Gekko and Bud Fox “greed.” Maybe more like Warren Buffett and Charlie Munger “greed.”

This post was originally a feature in Directorship magazine, November-December 2015.





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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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