Corporate governance: 5 steps marijuana firms should take as they grow

Rapid growth across the cannabis industry is forcing thousands of businesses to mature quickly – and it’s not always a smooth process.

Against this backdrop, experts say that marijuana companies – especially those seeking to go public – must pay careful attention to corporate governance in particular. They note the following points as critical to success:

  • Management and boards should be independent.
  • Real or perceived conflicts of interest must be strictly avoided.
  • Executive pay is best tied to performance.
  • Creating an executive committee of the board can prove a great option.
  • Gender diversity is key.

As companies hustle to gain market share and raise capital in an increasingly competitive environment, many are still playing catchup on basic corporate governance controls, said Cheryl Reicin, a partner at Torys in New York and Toronto and the head of Torys’ Life Sciences practice.

But it’s important to keep under control, she noted.

Mitch Baruchowitz, managing partner of Merida Capital Partners, said sound corporate governance controls will remain critical to winning over shareholders and luring institutional investors.

“When you go public, you’re asking people who are not current investors to bear the next set of risks your company will face,” he observed.

“There are a lot of ways to play in this (cannabis) space now, and the average sophisticated investor who is now looking at cannabis will be much less forgiving than they were a few years ago when there was limited capital and it was a retail market.”

Here are five key controls that corporate governance experts say are a must as cannabis firms mature:

1. Ensure independence from the top down.

As more institutional investors consider betting on cannabis, they’re looking for management teams and boards of directors with “integrity and independence,” Reicin said.

That starts by making sure the roles of CEO and board chair are not held by the same person.

“Many of these companies began because friends and people who knew each other in the industry decided to get together,” she said. “That’s not a misstep.

“But as these companies grow, investors will want to know that board members have the integrity and independence needed to stand up and speak up for what’s right for shareholders.”

2. Adopt rules to avoid conflicts of interest.

One red flag that can send investors packing: companies that have no controls in place to avoid conflicts of interest – real or perceived.

In Canada, Reicin said, there have “been a few hiccups” among some larger publicly traded cannabis companies that have done deals with firms that had commingled investments.

For example, after its January acquisition of Nuuvera, Ontario, Canada-based marijuana cultivator Aphria adopted new guidelines for its top leadership on investing in outside companies.

The deal raised eyebrows among industry observers after it was reported the company’s chief financial officer and six of its directors owned shares of Nuuvera . Those details had not been disclosed to shareholders.

3. Tie executive pay to performance.

Across nearly every business sector, executive compensation is one of the most scrutinized features of any company’s operations.

Investors will always look for clearly defined executive compensation plans that are reviewed by an independent committee of the board and link leadership’s pay to the company’s performance, Reicin said.

Last week, Los Angeles-based MedMen Enterprises revised its executive compensation plan “to provide greater economic alignment with MedMen’s shareholders.”

The move followed a week of pushback against the lucrative compensation plan included in the firm’s trading debut for its top executives.

“If someone is going to come in and invest, the most critical thing to consider is the use of the proceeds,” said Peter G. Stavropoulos, an attorney in Hoban Law Group’s New York office.

“If the main reason for the fundraiser was for management to get paid, then that should be disclosed. If it was to fund the build-out of that business, then that’s a plan that should be followed.”

4. Implement an executive committee to keep your firm nimble.

While some corporate governance controls get blamed for slower decision-making, there are tools that allow firms to move swiftly under certain circumstances.

By creating an executive committee of the board, companies can still quickly address urgent matters deemed appropriate by the board and shareholders.

“This is not to say that you should create an executive committee to make major decisions instead of going to the board,” Reicin said, “but rather a subgroup of the board with limited power to vote on items you may not need the entire board to meet to review.”

5. Focus on gender diversity.

Limiting the number of women – or not having any – on the board of directors can be a bad move.

Nearly 40% of firms listed on the Toronto Stock Exchange (TSX) in Canada had no female board members or executive officers in 2017, according to the Ontario Securities Commission.

But work is being done to change that.

Canada adopted new policies for those firms that require them to comply with a host of rules tied to the representation of women in director and officer positions, including disclosing targets for the number of women on the board.

Leading proxy advisory firms have also adopted new policies, including withholding a vote for the nominating committee chair of a TSX-listed firm if there are no female directors on the board.

This month, Tilray – a British Columbia-based cultivator owned by Privateer Holdings – appointed three women directors to its board.

The company touted that move as creating “one of the first majority-women-led boards in the cannabis industry.”

Lisa Bernard-Kuhn can be reached at [email protected]

2 comments on “Corporate governance: 5 steps marijuana firms should take as they grow
  1. Brett Roper on

    I am thinking your 1st comment ‘management and boards should be independent’ may be a bit of an oversimplification.

    Management cannot be ‘independent’ by the vary nature of their operational roles within the company and that certainly a Board of Directors should be majority populated by qualified independent directors and have diversity of the director team (ethnicity, gender, etc.) is certainly ideal of the directors have the experience and skills defined for the role they will be playing (audit committee chair, compensation committee members, etc.).

    Additionally, they cannot be independent of one another as they both have certain obligations to perform that require they remain in a good communication mode to accomplish the overarching goals of the company for which each group has specific responsibilities designated.

    The board generally provides for direction and corporate support elements while management is engaged on the front lines of operational sufficiency and tasking.

    Just my take.

    Reply
  2. Chet Billingsley on

    Public investors are investing as much in the founders as they are in the current business. The founders cannot have most of their marijuana business in a public entity and keep some choice projects outside. Otherwise the best and most promising new ideas tend to migrate to the outside and unfairly deprive public shareholders of what should be corporate opportunities.

    Reply

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