i3 - July/August 2016 - 2

From the CEO

Public Tech Companies to Face
Tough Investor Scrutiny

merican tech companies have had years of glory,
pulling the stock market indices up and making
their founders and early investors wealthy. Even
pre-public tech companies have generated interest and created wealth. A mythical term, "unicorn" now
describes younger tech companies with little if any profits

Just as
diversity is
our national
strength,
it should
be every
company's
culture.

JULY/AUGUST 2016

getting billion dollar plus market valuations. The
number of privately held American companies valued
at $1 billion or more is now at 163, according to CB
Insights. That's more than triple what it was in 2013.
But the bloom may be off the rose. At a recent
conference I spoke with various fund managers and
investment world leaders focusing disapprovingly on
tech companies for a variety of reasons:
Complaint: Excessive executive compensation.
Despite an increasing media drumbeat on the excess
of the one percent, founder-controlled boards are
giving themselves and other executives eight figure
pay packages, huge options packages diluting shareholder ownership and even multimillion dollar sums
to founders departing as executives.
Solution: Keep salaries away from most highly
paid lists, shift from granting options to giving
restricted stock, institute clawback provisions and
avoid gifts to founders.
Complaint: Two-tier stock gives founders
almost total control. It is legal to issue stock barring shareholders from exercising many traditional
shareholder rights. More, it is good strategy for
founders to encourage long term investments and
shield employees from in and out shareholders and
carnivorous takeovers which suck company value
and destroy good jobs.
Solution: Explain the long term investment
rationale candida. Consider transforming the
two tiers to one. Both strategies show confidence,
judgement and maturity.
Complaint: Ignoring low probability financial risks. After the disasters of BP, Target and VW,
corporate boards should be asking about financially
risky occurrences, even if they are low likelihood. The
greater the financial liability is, the lower the threshold for probability.
Solution: Boards need serious scenario discussions: What is the company doing about cybersecurity? What happens if company electronic records,

including customer and personnel records, are
corrupted or publicly released? What is the plan for
global warming? (Even skeptics should plan for real
climate change out of sheer prudence and recognizing that public opinion matters). How can the
company be affected by disgruntled violent employees, fraud or executive disrepute? Any real, even
low probability possibility, if it is high cost, requires
board questioning. Leaving these issues to auditors means board members are not exercising their
fiduciary duty.
Complaint: Lack of board and executive
diversity. The tech industry has a reputation as a
male-centric Animal House for tech-nerds. Many
companies have a glaring paucity of executives and
board members who are female, Hispanic or African
American. Companies with female board members
do better financially. France requires that 40 percent
of board members be women and pressure is building
by large pension funds like CalPERS to pass diversity tests or be disqualified from fund investing. Any
company lacking diversity at the board and executive
level is threatening its reputation, share price and
ability to tap the largest talent pool of employees.
Solution: Recruit diverse board members and
executives. Publicly traded company board members
should not only be CEOs, former CEOs, or trustworthy friends of founders or CEOs, they should also
include those who can add expertise in key areas such
as government, environment, technology, cybersecurity, partnering, strategy, and other countries and
cultures. Just as diversity is our national strength, it
should be every company's culture. Diversity matters
not only in hiring at the entry level, but in recruiting
interns, mentoring and promoting. Amazon demonstrably pays and promotes women. Salesforce is
committed to employee diversity. Intel pledged $300
million in investments to mirror our national diversity. CEOs and boards must commit to diversity and
opportunity and they must loudly and visibly show it.

Gary Shapiro,
President and CEO
I T I S I N N O VAT I O N

i3 - July/August 2016

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