A Diverse Bunch

Making ReachLocal a public company was a distraction for the management team of the Woodland Hills Internet marketing firm. But it was a distraction Chief Executive Zorik Gordon was willing to put up with to take the next step with the company he founded seven years ago. There were the meetings that seemed endless; 36 straight hours over a 10-day period by Gordon’s estimate. After the initial sale of company stock in May, there were increased responsibilities as going public brought in new investors and a new set of rules to follow. Five months into running ReachLocal as a publicly traded company, Zorik finds the experience not much different from a privately-held one. “It’s all about performance,” he said. “If you do something you’re going to have a wonderful experience as a public company.” ReachLocal is the newest of the public companies out of the more than 50 in a region stretching from Glendale to Camarillo and up to the Santa Clarita and Antelope valleys. These companies employ more than 400,000 workers and make up a diverse group that mirrors what is found throughout the state. Northern California is home to Apple, Wells Fargo, and technology giants Oracle, Intel Corp., Google Inc. and Cisco Systems. In comparison, the Valley has entertainment and media conglomerate The Walt Disney Co., rival studio DreamWorks Animation SKG Inc., Amgen, the world’s largest pharmaceutical maker, and restaurant chains DineEquity (parent of IHOP and Applebee’s) and The Cheesecake Factory. In finance, there are four banks; in real estate there is homebuilder the Ryland Group, LTC Properties, and PS Business Parks. Aerospace is represented by the navigations systems division of Northrop Grumman Corp. and AeroVironment, maker of unmanned aerial vehicles. If the Valley can be said to be dominated by an industry group it is technology, with a 30 percent slice out of the largest 50 companies. They range from semiconductor manufacturers to test and performance equipment firms to online services, such as what is provided by ReachLocal. As publicly-traded companies all are subject to some degree of openness and disclosure of their finances. The hand behind it all is corporate governance: policies, practices, and rules; in short the way management operates. Acting as overseers of those policies and practices is the board of directors whose composition remains a matter of debate over how independent the members can be. “I think of corporate governance as the basic block and tackle of how any organization should be run,” said Sanjay Sabnani, chairman and chief executive of CrowdGather, a Woodland Hills-based Internet firm traded on the Pink Sheets. Rather than being static, corporate governance is always evolving through new regulations and rules enforced by the U.S. Securities and Exchange Commission and through outside factors, such as when major corporate scandals take place – think Enron, Adelphia and WorldCom – or, as in recent times, a major economic collapse. Regulations The accounting problems surrounding Enron and other firms led to the passage of the Sarbanes-Oxley Act to reform business practices and bring additional oversight to how public companies operate. For small companies like CrowdGather, some of those requirements are in Sabnani’s view painful and costly. “There is a lot of paperwork and it is not a surprise that the financial sector and companies that live and die by the financial sector have more work in the past six years,” Sabnani said. More changes are on the way. With the passage of the Dodd-Frank Act this summer shareholders – or proxies – would get more say in the election of the directors serving on public company boards. That provision is currently on hold due to a lawsuit to work out the questions of who bears the cost of alternative director slates and whether shareholders should be able to put up nominees for directors, said Chris Mitchell, the president of the Southern California chapter of the National Association of Corporate Directors. “That is the biggest issue on the table right now,” Mitchell said. Starting next year, public companies will allow institutional investors a say on executive compensation, although their vote would be non-binding and only a recommendation. Any challenge to executive pay can create tensions between the investor groups and those executives protective of the salaries, stock options and incentives they receive. Senior executive compensation for the Valley’s public companies topped more than $330 million with the average at just less than $1.5 million, according to the most recent financial numbers available. Changes in the make-up of boards of directors can likely bring more scrutiny to the actions of executives, especially if activist investors get their candidates elected. Having a CEO also serve as a board chairman while perhaps not as prevalent as in the past remains a custom not disappearing anytime soon. This dual role raises its own set of issues as does the CEO appointing directors who are there to keep track of that same executive’s actions. USC Marshall School of Business Professor of Management and Organization Nandini Rajagopalan has done research that concluded independent board directors were a double edged sword. While these directors did a good job of monitoring and overseeing senior executives they added little value when it came to offering strategic business advice, Rajagopalan said. Selecting boards CrowdGather’s Sabnani found there are a lot of specifics that come with selecting a board of directors. His company’s board is small, just himself and three other business professionals, including a securities attorney and retired CFO, whose skill sets add dollar value that the company would otherwise pay for. “The board should be independent and neutral and a group that is respect worthy with enough expertise to help you out,” Sabnani said. However issues such as shareholder access to nominating directors and “say on pay” play out, it is a new environment for public companies in terms of their practices and policies whether they have been around for decades like a Disney or Northrop or just a matter of months like ReachLocal. Management behavior is always evolving, perhaps sped up by the recession, and new legislation and regulations are also tossed into the mix. “Putting it all together will have an impact on corporate governance post-recession, that is my sense,” Mitchell said. 50 Largest Public Companies at a Glance Total Market Cap: $173.7 billionTotal Revenues: $117.8 billionTotal Net Income: $9.9 billionTotal Employees: 404,491Total Number of Senior Executives: 227Total Senior Executive Compensation: $337,263,154Total Number of Board Members: 357Total Board Member Compensation: $37,095,348Average Stock Price: $17.19