Proofpoint's Board of Directors Part III; 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 continued looking into the company's Board of Directors (BOD), examining its committees and Practices. This installment will continue to look at Proofpoint's BOD, specifically the BOD Policies and related party transactions.
The first test of BOD Policies recommended by corporate governance research firm Institutional Shareholder Services (ISS) guidelines is ‘Does the company disclose board/governance guidelines as a single document? Proofpoint’s BOD does house its governance document in a single location on its website thus this criteria is satisfied. The next question related to BOD Policies is ‘Did outside directors meet without management present? Proofpoint has a policy requiring outside directors regularly meet without management present at least four times per year. By comparison, Intel Corp. (NASDAQ: INTC) has a policy requiring a minimum of three outside director meetings per year while Cisco Systems Inc. (NASDAQ: CSCO) mandates two such meetings each year. Proofpoint’s BOD satisfies this as a policy, but investors will need to monitor if these meetings do take place now that the company is publicly traded. The final test for BOD Policies is ‘Can directors hire their own advisers without management approval?’ Unfortunately for investors, Proofpoint’s governance document allows each committee to hire advisors but no individual Director can do the same. Although this policy matches the policies of both Cisco and Intel, Proofpoint does not distinguish itself in adequately representing the interests of shareholders. So overall, I consider Proofpoint to be neutral on the Policies component of governance effectiveness with an upgrade to acceptable upon proof that the outside directors are meeting without management regularly. Allowing individual directors to hire advisers would also be a positive step forward.
In its IPO filing documents, Proofpoint disclosed a related party transaction in 2009 in which the company offered a stock option exchange to executives holding certain options. The offer lowered the average exercise price from $4.56 or higher but at the cost of resetting the vesting schedule, even for those options that had previously vested fully. CEO Steele exchanged options convertible into 251,763 shares or more than 17% of his total holdings. The new, lower exercise price of the exchanged options is $3.06 thus the total dollar amount of the benefit to Mr. Steele was a minimum of approximately $378,000.
A second related party transaction disclosed in the IPO documents is the granting of Indemnification Agreements and Limitation of Liability for the BOD. These provisions fully protect the Directors with standard exceptions to coverage involving specified improper personal behaviors. This disclosure appears to conform with typical such arrangements thus it does not warrant additional investor examination.
The third disclosed item in the Related Party Transactions disclosure section in the IPO documents is the presence of Stockholder Agreements and related registration rights. This disclosure too does not present any concerning or unusual provisions thus does not warrant further investor diligence.
Finally, the company disclosed that the audit and nominating & governance committees are responsible for review and approval or ratification of related party transactions but that “these committees have not adopted policies or procedures for review of, or standards for approval of, related party transactions but intend to do so in the future.” This disclosure is a concern but can be remedied with the adoption of specific policies or procedures and should be monitored for completion in other future company SEC filings.
In summary then, Proofpoint’s BOD Policies are neutral and none of the related party disclosures raises immediate alarm bells, but investors should continue to scour future company communications for information about the status of adoption of formal related party policies & procedures in the audit and nominating & governance committees. The 10-Q for the 3/31/12 period, which was filed on May 24th, does not address the issue thus it still needs to be monitored for completion.
To wrap up the BOD analysis from the last three installments, investors can gain more comfort with Proofpoint’s BOD governance by tracking the following items: Affiliated Outside Directors’ share holdings before and after the lockup period, composition of BOD seats & committee assignments beginning in 2013, outside director's regularity of meetings without management, individual directors’ ability to hire advisers, and the status of the adoption of specific related party transaction policies. The “IPO pre-mortem” series on Proofpoint will continue with the next installments taking a look at management’s capital allocation decisions, a comparison with other recent tech industry IPOs, and a survey of current events that impact Proofpoint.
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