Micro-cap boards are smaller and less diverse, study finds

Aug 06, 2018
New study shines a light on the corporate governance practices at companies with a market cap under $300 million

Micro-cap boards tend to be less diverse and smaller than boards at Russell 3000 companies, according to new research, which its authors say ‘contradicts a number of micro-cap misconceptions.’

The Investor Responsibility Research Center Institute (IRRCi) and Board Governance Research studied the corporate governance practices at 160 micro-cap companies, with the goal of identifying what sets micro-cap companies apart from larger public companies.

The average board size of a micro-cap company covered by the study is 6.9 people, which is significantly less than the average of 8.9 people across the Russell 3000. Further, 22 percent of micro caps have boards with five or fewer directors.

This may partly be explained by the study’s findings that, on average, micro-cap boards are likely to have fewer sub-committees, and those sub-committees may meet less than once per year. The research shows that it’s common across Russell 3000 companies to have an audit, compensation and nominating and/or governance committee, and this is also the case at micro caps. But where larger companies may have additional committees – such as a finance, technology or strategy committee – that is less likely to be the case at micro caps.

Micro-cap boards are also less likely to have female directors. Gender diversity is an ever-growing focus for many institutional investors and pressure groups like The 30 Percent Club, but a lot of the focus has so far been on Fortune 500 companies. Of the micro-cap companies covered by the study, 61 percent have all-male boards. That number is much lower across the Russell 3000, where 21 percent of company boards are all-male.

‘The report suggests some paths micro-cap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board,’ says Jon Lukomnik, IRRCi executive director, in a statement.

The report also challenges the notion that micro caps are often young, founder-led companies. A large majority (86 percent) of the companies covered by the study have been in existence for more than 10 years and only 14 percent of the companies examined are run by a founder-CEO.

Only 7 percent of the micro caps covered have multiple classes of stock and only 4 percent have more than half of the stock owned by one individual. Lukomnik says these findings ‘contradict a number of micro-cap misconceptions.'

Annalisa Barrett, CEO of Board Governance Research, clinical professor at the University of San Diego School of Business and report author, says: ‘The smallest US companies play an important role in our economy, so everyone has an interest in how they are governed. Investors, employees, customers and suppliers of these micro-cap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management.’

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