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Effective corporate governance requires a proactive, focused state of mind on the part of directors, the CEO, and senior management, all of whom must be committed to business success through maintenance of the highest standards of responsibility and ethics. Although there are a number of legal and regulatory requirements that must be met, good governance is far more than a mere list of minimum board and management policies and duties.
Even the most thoughtful and well-drafted policies and procedures will fail if directors and management are not committed to enforcing them in practice. A good corporate governance structure is a working system for principled goal setting, effective decision making, and appropriate monitoring of compliance and performance. Monticello Capital has the experience and know-how to assist in development of a sound governance framework and structure and to assess and enhance any existing structure that will improve performance of the board.
Case Summary
The deal left a painful legacy: a corporate Board where half of the members were unqualified, led by a chairman who was second-rate in every respect. The Board’s membership and leadership were two non-economic terms of the acquisition agreement. Monticello Capital’s client was the stronger half of the transaction, now faced with the issue of what to do with its newly merged Board. Management was firmly in the hands of the client, but governance was shaping up to be a real problem. The solution was an investment banking innovation created at Monticello Capital: the re-election vesting. Demanding individual Board member performance criteria were put in place, with incentives for actual measurable results. Nonqualified stock options for Directors were issued - but they could only vest after the Director survived re-election by the stockholders. A year later, every one of the weak Directors failed re-election, unsuccessful in performing to the standards the Board set for itself. The unqualified Directors’ year in office coincided with a financially retrenching year that absorbed the acquisition, and the company went on to increased revenue growth and higher profit margins. Board standards and the option plan remain in place at the company, where each of the Directors subject to the original re-election vesting is still serving.
Case Summary
The client company was in major transition. The founders had purchased a clean public shell and executed a reverse merger, gaining the currency of public paper in an attempt to raise new capital. This manner of financing always works well in theory, but the Board found that there was almost no market appetite for its now-public stock. The legal and audit requirements of the Sarbanes-Oxley environment were also proving costly and burdensome. A share price improvement plan was developed. Monticello Capital suggested some bold moves, including a change in CEO and a charter for a strong executive chairman. One tactic was seemingly counterintuitive, bringing some industry-tried and trusted executives out of retirement and actually raising the mean age of the Board significantly. The company’s financial fundamentals became the Board’s first priority, and management was presented with an increasingly demanding series of deliverables by the Board. The Board’s hard work paid off, as the share price increased exponentially, possibly fueled by day trader interest. New financing rounds of debt and equity were the inevitable result. Within 20 months the firm’s market capitalization grew to 3.5 times its value at the time of the reverse merger.
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