Are Cleantech Firms Ready for the Spotlight?

If you don’t work for a public company, then chances are you aren’t paying much attention to additional new corporate governance rules that went into effect at the start of this year. The U.S. Securities and Exchange Commission (SEC) further amended proxy disclosure rules to compel companies to report how pay relates to risk, how the board oversees risk and the qualifications and diversity of their directors.

It might be tempting for emerging cleantech firms to put off thinking about how these changes might affect the way they conduct themselves as closely held companies. But with investor appetite increasing for cleantech IPOs, the public spotlight might arrive a lot sooner than many executives are counting on. Already this year, cleantech start-ups including Silver Spring Networks, Codexis Inc. and Tesla Motors have filed to go public, and many more will likely follow suit in the months to come.

A particular challenge for cleantech start-ups is the high level of risk attached to their nascent business models. In Tesla’s registration filing with the SEC, for instance, it cited a “limited operating history” and planned sales of a vehicle still in development among the risks that make it “difficult to predict our future revenues and appropriately budget for our expenses.”  Despite this uncertainty, the company said it began a comprehensive review of its executive compensation policies in the fourth quarter of 2009, and even hired a compensation advisory firm to recommend changes.

As two attorneys who have spent their careers advising energy companies on such matters, we urge our clients to get their houses in order well in advance of having to disclose their compensation, risk-management and board composition policies to regulators and shareholders. We have found that such changes represent a significant cultural shift for start-up companies, one that can take months, if not years, to achieve.

With that in mind, cleantech executives should get ahead of the game soon to instill three best corporate governance practices among companies preparing to go public:

  • Start with the right people at the top.  Populate your board and executive suite with experienced persons who are expected to make meaningful contributions to your business, governance, compliance and risk management.  Embrace diversity, whether of viewpoints, professional experience, education, skill, race, gender, national origin or other individual qualities and attributes.
  • Establish the right tone at the top. Don’t expect your employees to conduct themselves differently than you.   If you prioritize integrity, effectiveness, quality and compliance, they will too.  Ask your teams to constantly consider how their conduct would be received as a national headline in the morning newspaper.   
  • Align performance incentives with sound business decisions. Compensate performance in a way that doesn’t encourage excessive or inappropriate risk taking.  For example, it may be inappropriate to simply reward closing a deal or creating a product when expected returns from the deal or product have yet to be realized.

While the SEC doesn’t mandate how public companies govern, compensate and manage risk, the agency’s increasing detailed disclosure requirements in these areas are expected to focus management on best practices.  And investors and their advisory firms are watching.

Paul Dickerson leads Haynes and Boone LLP’s Cleantech Practice Group out of Houston. Nora Dobin is Asst. General Counsel of Mariner Energy Inc., an NYSE-listed company.

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