CEO Jack Dorsey's lineup of heavy hitters on Square (SQ) 's board may be eye-catching, but it may cost shareholders some lucrative opportunities, analysts say.
With a 10 rating, Square has the highest corporate governance risk possible on the Institutional Shareholder Services' (ISS) rating scale, based on an August report, According to the report, the San Francisco-based mobile payment company is particularly lacking in categories including takeover defenses, meeting- and voting-related issues, and an unfavorable use of equity compensation. The more general criteria, "board practices," also clocked in at the bottom of the ISS scale.
There are also no meaningful incentive grants to Square executives, shareholders lack the ability to call special meetings, short-term performance targets are absent, and policies surrounding the bestowing of stock rewards are murky, according to the ISS.
"The board is authorized to issue blank-check preferred stock," the shareholder protection agency added, noting that Dorsey "is subject to stock ownership requirements but there is insufficient information to determine the percentage of salary that constitutes a stock ownership guideline."
Square's board members certainly have a substantial amount of skin in the game. According to shareholder advisory firm Glass Lewis, three of Square's top 10 shareholders have seats in the corporate boardroom. Dorsey owns about 21% of the company's outstanding shares, Square co-founder James McKelvey Jr. holds about 8% and Silicon Valley venture capitalist Mary Meeker holds more than 2%. Vinod Khosla, whose Khosla Ventures holds a 15% stake in Square, is a former board member and current advisor to the board.
Marc Feigen, CEO of board-advisory firm Feigen Advisors, whose firm helped counsel roughly 20% of all new Fortune 100 CEOs between 2014 and 2015, says Square has managed to build "a dream team that speaks to Jack Dorsey's eminence and the belief that people have in his ability to deliver."
Dorsey, who is also the founder and CEO of Twitter (TWTR) , was able to surround himself with what Real Money's Jim Cramer calls "one of the most heavyweight boards on Wall Street," largely because Dorsey is perceived by many corporate titans to be a valuable connection to the latest happenings in Silicon Valley, Feigen said in a phone interview with Real Money. Dorsey is also an active independent director at entertainment and media giant Disney (DIS) .
But Dorsey's varied obligations could prove to be unduly taxing on Square shareholders, Glass Lewis analyst Greg Waters said in a recent report.
"Since the company started preparing its IPO filings, a constant source of comment and criticism from investors and observers has been Mr. Dorsey's service as the CEO of both the company and Twitter, the embattled social messaging company," Waters said. "While we do not believe that shareholder opposition to Mr. Dorsey on this basis is warranted, we do believe it is fair to question the long-term viability of his dual roles, which reportedly lead to Mr. Dorsey often working 18-hour days."
Despite just a $4 billion market cap, which is dwarfed by industry peers including PayPal (PYPL) and Google parent Alphabet (GOOGL) , Square's boardroom boasts a cadre of leaders in finance, academia and even rival companies -- including PayPal itself, with the rival's CFO Roelof Botha in the boardroom. (PayPal's roughly $46 billion market cap is more than nine times that of Square.)
On the finance side of the table, Square's board includes former Goldman Sachs (GS) Chief Finance Officer David Viniar as well as Paul Deighton, Goldman's former head of European operations and regional chief operating officer.
Viniar served as Goldman's CFO from May 1999 through January 2013, and Deighton served as the investment-banking giant's head of European operations from 1996 to 2000, and regional chief operating officer from 2000 to 2006, according to data compiled by Boardex.
From the world of academia, Harvard University President Emeritus Lawrence Summers and Brown University's former President Ruth Simmons joined Square's board shortly after the company's successful November IPO. However, Glass Lewis notes that Summers attended less than 75% of the meetings held by the board in 2015. "We view this as a failure by this director to fulfill a fundamental responsibility to represent shareholders at such meetings," analyst Waters wrote.
The board lost retired NBA star Magic Johnson before its May lock-up period ahead of its initial public offering.
"It's Jack Dorsey for sure, with a good idea," Feigen said of the appeal of working on Square's board of directors. "People want to know what he's doing. If you're Ruth Simmons, Summers or Deighton, it's important for you to be connected with people like Jack Dorsey on the West Coast."
With established companies increasingly attempting to draw closer to the West Coast tech scene -- in cases such as Ford's (F) Tuesday announcement that the 113-year-old automaker is planning to double its Silicon Valley team in order to release fully autonomous cars by 2021 -- connections to innovators like Dorsey have never been so valuable, Feigen says. He notes the feeling in such cases is often mutual, as entrepreneurial companies like Square depend on access to the capital, credibility and connections found in its corporate team.
But the compensation package for Dorsey's board may have become be so pricey that, according to Glass Lewis, the growing company could be prohibiting its shareholders from the lucrative prospect of a takeover offer.
"Shareholders should be concerned that the company provides immediate vesting of certain equity awards upon a change in control of the company," Waters said. "This provision may discourage potential buyers from making an offer for the company both because the purchase price will be higher and because substantial numbers of employees may earn significant amounts of money and decide to leave their positions with the company."
Shares of Square have been on a recent surge, up 28% over the past three months. Of the company's 23 listed analysts, 48% have Buy ratings and 52% maintain Hold ratings or its equivalent, and the consensus 12-month price target is $12.68.