COMPANIES receiving venture capital backing are generally better at corporate governance when they list on the stock exchange than those that have not gone down the venture capital path, according to a study by the Australian School of Business.
Based on 11 years of research by Associate Professor Jo-Ann Suchard in association with the Australian Private Equity and Venture Capital Association, the study examined corporate governance at companies that had gone through an initial public offering.
It finds that listed companies with VC-backed boards have more independent directors and a higher percentage of independent directors with industry experience than non-VC companies that have gone to an IPO.
“It is established in international markets that venture capitalists add value through various types of activities beyond just giving money,” Suchard says.
Her research shows VC-backed firms have more independent directors. “These were not just non-executives, but directors who didn’t have any prior or existing relationship with the company, so they weren’t lawyers or bankers or accountants who had a prior working relationship,” she says.
Suchard says VCs use their networks to bring in specialist independent directors to help run companies, and therefore provide better corporate governance, which should help protect shareholder interests and contribute to better performance over time.
Luceille Outhred, chief executive of South Australian technology innovation group Digislide Holdings, says having VC backing has definitely helped her company achieve stronger corporate governance.
“We’ve gone through seed capital raising and angel raising, and each time we’ve gone through a different stage, as a natural consequence of the business growing but also as a necessity for raising additional capital at a higher level, our policies and procedures have tightened up,” she says.
“We always had a goal of listing on the ASX or the New York Stock Exchange, or Nasdaq, so we have constantly been upgrading our policies and our procedures, both operational and governance.
“Digislide has received about $12 million in venture capital funding and we would be in a position to lodge with ASIC for an ASX-listed company if we choose to do so, because all our policies are at the highest level and the implementation is at the highest level.”
Dr Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association, says VC-backed companies are used to working with a board, whereas many other companies that list for the first time have not previously done so.
“A lot of companies think they don’t need a board in the earlier stages of being a company and so people are just not used to having a board,” Woodthorpe says.
“It is difficult, however, finding independent directors, particularly people who are interested in working with smaller technology companies, which are perceived as having higher risk.”
Ivan Kaye, director of BSI Australia, which provides venture capital funding through its Australian Distributed Incubator arm, says a condition of putting money into a company is that they move towards having the right structures in place.
“There are generally independent or non-executive board members put on by the VC.
“As a result of that, the shift from a private company to listing is smaller than with a company that hasn’t had VC backing.”
Mike Hershorn, director of Four Hats Capital, manager of the Nanyang Innovation Fund, says one of the first things to improve in the field of corporate governance is a company’s financial reporting.
“That’s really the first step, because if the board doesn’t have accurate financial reports it can’t work well to improve the company.”
* Companies with venture capital backing tend to have better corporate governance
* Independent directors have a stronger presence on the board
* The right governance structures are often a condition of VC funding
* Better governance brings better financial reporting
The Australian, 28 Nov 2008