Question
What corporate governance changes can drive shareholder value?
Answer
To set the context of my answer, many lower mid-market companies have a Board of Directors, but the board is made up of someone's mother and brother who have never done anything except vote in his favor. Test 1 for corporate governance is: do they have a board? Do they have governance best practices in place? Test 2: are those governance and board best practices really working, and do they work in the context of an M&A deal? You could have a very good board that is doing its job but lacks any transactional experience.
So, you’re opening up a huge can of worms here. You may know this, you may not. There is a very big debate across North America and around the world about how engaged boards are around strategy. Do they really understand the strategy and business models of the companies to which they govern? So when we think about mitigating risk as a board, you typically think about things like fairness opinions and secondary due diligence reports, but really what the board needs to do to drive shareholder value is to be more engaged in the strategy discussions of the company so that by the time the deal is being presented to the board, the board knows where it fits into the acquisition strategy. The board knows that the M&A acquisition criteria and screens and filters that were built and presented to them six months ago that this deal meets those screens and filters.
So I would say that being more engaged as a matter of governance, putting the right board together. A middle market business owner could have a really great board that knows their industry really well but has no M&A experience. So the CEO presents the deal to the board and the board is like, "Well, that looks good, okay. Yeah, I guess so." You want the board engaged in real substance to make sure that your other value is driven and to just go get a third party fairness opinion is kind of lazy. Yes are there still value in those fairness opinions. Of course there are, but it’s lazy. The real robust board, the engaged boards, they are asking all the hard questions before we even get to the fairness opinion.
So, you’re opening up a huge can of worms here. You may know this, you may not. There is a very big debate across North America and around the world about how engaged boards are around strategy. Do they really understand the strategy and business models of the companies to which they govern? So when we think about mitigating risk as a board, you typically think about things like fairness opinions and secondary due diligence reports, but really what the board needs to do to drive shareholder value is to be more engaged in the strategy discussions of the company so that by the time the deal is being presented to the board, the board knows where it fits into the acquisition strategy. The board knows that the M&A acquisition criteria and screens and filters that were built and presented to them six months ago that this deal meets those screens and filters.
So I would say that being more engaged as a matter of governance, putting the right board together. A middle market business owner could have a really great board that knows their industry really well but has no M&A experience. So the CEO presents the deal to the board and the board is like, "Well, that looks good, okay. Yeah, I guess so." You want the board engaged in real substance to make sure that your other value is driven and to just go get a third party fairness opinion is kind of lazy. Yes are there still value in those fairness opinions. Of course there are, but it’s lazy. The real robust board, the engaged boards, they are asking all the hard questions before we even get to the fairness opinion.
Share this Q&A
Tags
Post Sale
Process Documentation
Readiness
Differentiation
Company Premium
Employee Communication
Expectations
Financial Buyers
Written by Andrew J. Sherman
Andrew J. Sherman is a Partner in the Corporate Department of Seyfarth Shaw LLP
Follow:
More Q&As from our experts
- What are important legal issues to consider in a Letter of Intent?
- How do you value intangible assets in a business sale?
- What are some creative M&A deal structures?
Related Terms
Related Articles
Term of the Day
Tombstones are grave-looking, simple print advertisements in black and white that are used to make an announcement....
Read Full Term
Subscribe To the Divestopedia Newsletter!
Stay on top of new content from Divestopedia.com. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.
Resources
- Q3 2020 SS&C Intralinks Deal Flow Predictor: The Work From Home Issue
- [Free Whitepaper] Q3 2020 SS&C Intralinks Deal Flow Predictor: The Work From Home Issue
- Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
- Upcoming Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
- Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
