February 24, 2017
As the days inch closer to the highly anticipated initial public offering for Snap, Inc., the “camera company” that is the parent of popular messaging service Snapchat, questions continue to swirl around what investors can expect if they decide to participate in the IPO on March 2. Equilar Board Intelligence looked at five governance issues that could arise based on early indications and filings from the company.
1. No Say on Pay
Snap’s proposal is unusual with regards to shareholders’ ability to voice their opinions on the company’s executive pay practices. The company’s proposal (updated on February 9th) would not require shareholder votes on executive compensation packages, or Say on Pay votes.
While Say on Pay votes are generally high for public companies, and have not necessarily correlated to a check and balance on rising CEO pay, the annual vote on executive compensation has been seen as a net positive as an initial touch point for regular issuer-investor relations and shareholder engagement with management and the board.
2. “Total disenfranchisement of public shareholders”
In its IPO, Snap plans to offer exclusively non-voting shares, substantially limiting shareholder access to and influence over company operations. Furthermore, Snap’s co-founders maintain a substantial majority of the company’s ownership, with a combined 88.6% of the total voting power, and that majority will persist following the public offering. For all of these reasons, Snap’s board of directors will likely maintain a level of agency over compensation program design unparalleled at large, publicly-traded companies.
The New York Times published a series of columns about these voting rights more generally offered (or not offered, as it were) to Snap investors, which were dubbed “the most shareholder-unfriendly governance in an initial public offering, ever.” That claim aside, the columns detail how tech IPOs have become more guarded against shareholder influence. When stocks perform, this is rarely a major issue, and by all expectations Snap is expected to come out like a shot. While investors looking for early gains may be willing to take the risk, how will long-term institutional investors feel about the possible lack of ability to work with leadership down the road?
3. Director elections and proxy access
In the age of proxy access and shareholder activism, investors’ voting power allows them to keep pressure on boards to perform and create shareholder value. With Snap’s share structure and lack of annual board elections, these points often leveraged when shareholders have concerns will be unavailable unless Snap decides to implement them voluntarily.
4. Uncertainties about director pay
Reports that Snap’s lone female director, Joanna Coles, was paid less than her fellow directors turned out to be somewhat misleading—in initial filings, a stock grant with a four-year vesting schedule that put her on equal footing with several other directors was not disclosed for 2016, as it was awarded in early 2017. The pay structures will likely change as the company enters its life as a public company, as the S-1 said the board will adopt a director compensation policy following the IPO. There’s a high likelihood that all directors will have a similar pay structure—typical of public company boards—but it’s anyone’s guess as to how this scenario unfolds.
5. Potential upside may quell unrest
For all the governance questions that may clash with what are considered current best practices, all of these points will be moot if Snap performs well—at least in the near term. As an example, the Los Angeles Times reported that the company’s top shareholders will earn hundreds of millions with the IPO.
There is also another question: whether heavy investor input is healthy for a company that is still ramping up quickly. For example, Facebook’s investors have a minority voice (to put it nicely), but they’ve been rewarded as the company has pivoted and innovated with little pushback. On the other hand, Twitter, which offered a one-share, one-vote structure in its IPO, has clashed with investors with respect to strategic goals over the years. That’s not to say shareholder feedback was integral to the success or struggles of either company, but this variable may be in the back of the Snap founders’ minds as they lay out their strategy for the coming years, which could substantially depart from what got them to one of the highest tech company valuations in recent years.
For more information on Equilar research and data analysis, please contact Dan Marcec, Director of Content & Communications at firstname.lastname@example.org.