Proofpoint's Board of Directors; IPO 'Pre-Mortem' Continued
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For every public company, the Board of Directors (BOD) is the link between shareholders and the managers who will be implementing the strategies for creating sustainable cash flow and ultimately for increasing shareholder value. In the latest installment of my "IPO pre-mortem" series, I examined the strategies that recent IPO Proofpoint Inc. (NASDAQ: PFPT) will employ to create shareholder value from its competitive advantages. This installment will begin to explore Proofpoint’s BOD by revealing its individual Directors’ professional backgrounds, the composition of the Board, and its overall independence. This will be followed by an examination of the composition of the various Board committees; Board practices and policies; and related party transactions. The BOD matters to investors because it is making decisions on investors' behalf. Corporate governance research firm Institutional Shareholder Services provides a useful structure for analyzing this crucial aspect of a public company’s success.
Proofpoint currently has eight seats on its BOD with two seats occupied by Inside Directors and the remaining six seats occupied by Affiliated Outside or Independent Outside Directors, as defined by ISS. Proofpoint has a staggered term structure in which two Directors face election in 2013, three others in 2014 and three others in 2015. This structure is very favorable for Proofpoint's investors when considering that competitors like Cisco (NASDAQ: CSCO) and Intel (NASDAQ: INTC) have larger boards but do not stagger their members' terms.
The first Inside Director is Eric Hahn, who founded Proofpoint and serves as Chair of the Board (COB). He is the Chair of the Nominating & Governance Committee and maintains a 3.5% ownership stake in the company. His term expires in 2014. The other Inside Director is the CEO Gary Steele. Mr. Steele has a 4.8% stake in the company and his term expires in 2015. He does not serve on any BOD committees.
Anthony Bettencourt, Dana Evan, and Philip Koen are the three Independent Outside Directors. Mr. Bettencourt is the CEO and COB of privately held Coverity Inc. and he has experience as a senior executive at various technology companies. He does not serve on any committees, holds less than 1% of company shares, and his term expires in 2015. Ms. Evan currently serves on the boards of directors of companies in the Internet, technology, and media sectors, and has experience as Chief Financial Officer (CFO) at VeriSign, Inc. Ms. Evan, who holds less than 1% of company shares, serves on the Compensation Committee, is the Chair of the Audit Committee, and her term expires in 2015. Mr. Koen is COB and CEO of Intermedia.net, Inc., a private technology company and he has served as CEO, Chief Operating Officer (COO) & CFO of other technology companies. Mr. Koen owns less than 1% of company shares, serves on the Audit Committee, and his term expires in 2013.
The Affiliated Outside Directors are Jonathan Feiber, Kevin Harvey, and Rob Ward who each represent the interests of their respective venture capital funds which collectively control about 36% of company shares. Mr. Feiber is the General Partner at Mohr Davidow Ventures. He serves on the Compensation and Nominating & Governance Committees and controls 13% of company shares through the MDV VII fund. Mr. Feiber’s term expires in 2014. Mr. Harvey, who is the founder and general partner of Benchmark Capital, is the Chair of the Compensation Committee and controls 13% of company shares through the Benchmark Capital Partners IV fund. Mr. Harvey’s term expires in 2014. Mr. Ward is a founder of Meritech Capital Partners, serves on the Audit Committee, and controls 10% of company shares through the Meritech Capital Partners II fund. His term expires in 2013.
There are several measures to consider when examining the overall independence of the BOD. Is the Board more than 50% independent? Is the COB independent and separate from the CEO? Is there a Senior or Lead Independent Director? What percentage of the Board has a familial relation to executives or majority shareholders of the company? What percentage of the Board are former executives of the company? While Proofpoint’s COB and CEO roles are separate, less than half (3 of 8) of BOD members, including the COB, can be characterized as independent. Additionally, the Board has not designated a Senior or Lead Independent Director to act as liaison between the non-independent COB and the Independent Directors. This omission of a Senior or Lead Independent Director is a glaring weakness when compared to Cisco where Carol Bartz has served in that capacity since 2005. Intel also has provisions for a Lead Independent Director. There are no familial relationships among the Directors & company officers and only 1 of 8 BOD members is a former executive of the company. On a scale from negative to neutral to positive, I rate the BOD of Proofpoint as just below neutral in terms of its independence, mostly because only 3 of 8 Directors are independent. The absence of an independent COB is also a detrimental factor but a more negative evaluation is precluded by the fact that the CEO and COB roles are separate, the lack of family relationships, and the absence of former executives on the Board.
We now have insight into the professional capabilities, overall independence, and ownership stakes of Proofpoint’s BOD. The BOD has a solid breadth of technology and business leadership experience, significant company ownership, and an effective staggered term structure that counterbalances, to some degree, the less than optimal level of BOD independence. Investors should be vigilant about the level of independence as board seats begin expiring in 2013. A move toward 50% or higher independent seats will be a very positive development for Proofpoint while the opposite result will significantly weaken the long term investment appeal of Proofpoint’s shares. The next installment of the "IPO pre-mortem" series will continue by looking at the composition of Proofpoint's various Board committees, Board practices & policies, and related party transactions.
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