Proofpoint's Board of Directors Part II; IPO 'Pre-Mortem' Continued
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In the previous installment of my ongoing “IPO pre-mortem” series on Proofpoint, Inc. (NASDAQ: PFPT), I delved into the company’s Board of Directors (BOD), examining its individual Directors and the overall level of independence. This installment will continue to look at Proofpoint’s BOD, specifically BOD committees and the Practices of the BOD. After this installment, I will turn to the BOD Policies and related party transactions in the next installment.
As important as the independence of the whole BOD is the independence of three key committees within the Board. Corporate governance research firm Institutional Shareholder Services (ISS) guidelines suggest that the Compensation, Audit, and Nominating & Governance Committees be composed of a minimum of 75% independent outside directors for effective shareholder representation. The Compensation Committee is comprised of Chair Kevin Harvey, Mr. Jonathan Feiber, and Ms. Dana Evan. Mr. Harvey and Mr. Feiber together control 26% of company shares and are Affiliated Outside Directors while Ms. Evan is an Independent Outside director. The Compensation Committee does not meet the 75% independence guideline. Additionally, the terms of Mr. Feiber and Mr. Harvey expire together in 2014 which is before Ms. Evan’s term which expires in 2015. The Compensation Committee raises some concern for shareholders.
Ms. Evan serves as Chair of the Audit Committee which also has Mr. Philip Koen and Mr. Rob Ward as members. Mr. Koen, like Ms. Evan, is an Independent Outside director while Mr. Ward is an Affiliated Outside Director who controls 10% of shares. Ms. Evan and Mr. Koen control less than 1% of company shares each. As Class I Directors, Mr. Ward and Mr. Koen will see their terms expire in 2013, followed by Ms Evan in 2015. 67% of the Audit Committee is independent which is higher than the Compensation Committee but still not at or above the 75% ISS threshold. The Audit Committee raises a moderate level of concern of inadequate independence but having Ms. Evan as the Chair is a positive factor.
The Nominating & Governance Committee has the least independence of all the committees with neither of the members being an Independent Outsider director. Chair Eric Hahn is the founder of Proofpoint and is an Inside Director while Mr. Feiber is an Affiliated Outside Director. As Class II directors, Mr. Hahn and Mr. Feiber face 2014 term expirations. The Nominating & Governance Committee raises an elevated level of concern for its lack of independence.
Taken as a whole and individually, Proofpoint’s BOD committees do not meet any of the independence levels suggested by ISS. By comparison, the BOD committees of competitors Intel Corp. (NASDAQ: INTC) and Cisco Systems Inc. (NASDAQ: CSCO) are fully independent under ISS criteria. This implies that Proofpoint’ BOD is lagging in providing effective shareholder representation and so investors would do well to actively monitor the Affiliated Outside Directors’ share holdings before and after the lockup period expires in October of 2012. They should also keep tabs on BOD seats & committee assignments for any changes once terms begin expiring in 2013.
Another aspect of the BOD that needs to be understood by investors are the Practices that the BOD follows. There are four components related to Practices. The first test of how well the BOD’s Practices serve the interests of investors is ‘How many boards of directors does the CEO serve on?’ CEO Gary Steele does not sit on any other BODs thus Proofpoint satisfies this criteria. By comparison, Intel CEO Paul Otelllini’s only other corporate board service is on the Google BOD while John Chambers, CEO of Cisco, serves on no other corporate boards. Mr. Otellini and Mr. Chambers both serve on the board of TechNet, an industry advocate while Mr. Chambers serves on three other non-profit or philanthropic boards, The next question related to BOD Practices is ‘How many non-executives serve on an excessive number of outside boards?’ Again, Proofpoint’s BOD satisfies this criteria as no non-executives serve on more than the guideline six outside boards.
The third test of BOD Practices is ‘Did any directors attend less than 75% of the board meetings without a valid excuse?’ In the case of recent IPO Proofpoint, there is not a public record yet of board meetings as a public company so this criteria is neutral but should be monitored going forward. Finally, investors should know ‘How many directors received withhold/against votes of 50% or greater at the last annual meeting?’ Again, recent IPO Proofpoint has not had its first annual meeting as a public company thus this criteria is neutral and should be monitored by investors.
On balance then, Proofpoint’s BOD Practices rate as acceptable but with the caveat that not all criteria have been positively met and will not be until 2013. Vigilance on these outstanding issues is suggested for current and potential investors.
Proofpoint’s BOD does not have a sufficient level of independence in its committees to optimally represent shareholder interests but does embrace acceptable Practices. In the next installment of the “IPO pre-mortem” series on Proofpoint, I will wrap up the BOD discussion with a look at BOD Policies and related party transactions.
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