The D&O Diary is on assignment this week at The Stanford Directors’ College at the Stanford Law School in Palo Alto, California. As always, the conference is well-attended (it is, in fact, sold out, as usual) and the agenda is full of timely topics and interesting speakers.
The conference began on Sunday evening with opening keynote speech from Robert Greifeld, the CEO of the NASDAQ OMX group. NASDAQ is one of the event’s sponsors, and Greifeld joked with conference co-Chair Joseph Grundfest that next year his firm would increase its sponsorship level so that he would not have to speak at the conference -- a line that drew a knowing laugh from an audience that was all too familiar with the public discussion of the possible involvement of NASDAQ in the problems that surrounded the recent Faacebook IPO.
To Greifeld’s credit, he did not run from the topic of the Facebook IPO, and in fact it was the first issue he addressed. He acknowledged that a “design flaw” in NASDAQ’s IPO process allowed problems to come into the early trading, particularly with respect to the timing of order cancellations. He acknowledged that there may have been some “overconfidence” and even “arrogance” in the team that was running the IPO process because they were relying on procedures and routines that had been used in 480 IPOs over the course of several years without a problem.
In retrospect, Greifeld said, the pre-offering testing was not rigorous enough. He said that the company has tremendous pride in its technology group, but that perhaps the business unit because too “subservient” to the technology group, as a result of which, there was “not enough business judgment” in the process. He said that the company has reached out for external help from IBM to examine the trading process from an outside perspective. IBM will report at the end of July.
As for whether the events surrounding the Facebook IPO will undermine the market for IPOs generally, Greifeld acknowledged their may be some short run effects. However, he added, he expects that over time, IPOs will track the overall market. Over the medium and long term, the markets will mirror GDP growth in the economy, because the markets are tied to the fundamental economic health of the economy.
He did observe that the equity markets have had issues since 2008, as since that time there has been a “steady flow” of money from equity investments to fixed income investments – even though in the current interest rate environment, fixed income investments are effectively paying zero return. This, he notes, is not good news for the equity markets.
He added that the markets are now “fundamentally different” than they were ten years ago. They are much more fragmented with many more trading platforms, which has produced beneficial competition but has also led to fragmentation. These developments, and other recent developments such as dark pools and high frequency trading, are more beneficial to larger cap companies, because it can help to ensure that the spreads on trading in their securities are tight. For other companies, these developments are bad, and can affect the market liquidity in trading for their shares.
Today’s sessions began with a Keynote Presentation from Marc Andreessen and Ben Horowitz, the founders and general partners of venture capital firm Andreessen Horowitz. Andreessen is well known as the founder of early Internet browser company Netscape and Horowitz was the co-founder of Opsware (formerly Loudcloud). Their presentation was in a Q&A format, and one question they received provoked a particularly interesting answer.
In response to a question about how a Board should prepare a company for an IPO, Andreessen’s initial response was that the company should first consider every other possibility other than going public. He emphasized that the IPO process and the life for a company post-IPO has changed so much in recent years, that now a company completing an IPO is immediately surrounded by a host of constituencies all of which are prepared to try to extract a “pound of flesh” from the company. If the company has to go public, Andreessen would prefer that the company remains a “controlled” company – that is, subject to control by the founder. He explained that the way for investors to make money on technology investments is for the investors to pick a founder, like a Jeff Bezos, Sergey Brin or Michael Dell, and to make a long-term commitment to them to try to achieve their goals for the enterprise.
He went on to say that a faulty premise has emerged around corporate governance, in that there is now a perception that corporate governance ought to operate on basic principles of democracy, particularly as embodied on the “one man, one vote” principle. From Andreessen’s perspective, democracy is not the correct model. According to Andreessen, the correct analogy is the military, and specifically, war. In a wartime environment, politicians cede control to the military commanders so that they can deploy assets and take initiative necessary to “take the hill.” The objectives are more likely to be met if the founders retain control.
Horpwitz discussed a number of topics that he has previously addressed on his blog, Ben's Blog. In particular, he discussed the difficulty for a yoind company to try to function with outside managers who are brought in from the outside for their management knowledge but who lack the institutional history and tribal knowedge of the entrepreneur found. In his view, it is easier to teack the entrepreneurial founder the basic principles of management than it is to try to teach the professional manager the firm history and tribal knowledge.
The conference continues to run though Tuesday, and I hope to be able to continue to report while I am here. On Tuesday, I will be participating in a session at the conference on the topic of Indemnification and D&O Insurance with my good friends Priya Cherian Huskins of the Woodruff Sawyer insurance brokerage firm, and Chris Warrior of Beazley. The complete program guide for the conference can be found here.