Hot topic of the month 

Corporate Governance Considerations in Initial Public Offerings 

Many private companies must undergo a dramatic revision of their corporate governance structure and practices before becoming a public company. As investors and regulators have increased their focus on corporate governance, they have come to expect companies to do the same. Recent governance reform has required companies to consider their board and committee structure, composition, and practices in an unprecedented manner. In light of this, companies considering an initial public offering (IPO), or another event, such as a purchase, sale, or divestiture, should begin thinking about how their governance structure fulfils these new demands. This edition of Hot Topics discusses considerations to help such companies in this process.

Preparing for Potential Challenges 

Impediments to effective corporate governance structures should be considered well in advance of an IPO, as there are a variety of challenges that private companies may encounter as they work to enhance their governance structures. Some examples of the key challenges related to corporate governance in an IPO transition that management and the board should be thinking about include:

• Lack of a formalized governance framework and clearly defined roles and responsibilities for management and the board
• Deficiency of qualified, independent directors
• Limited time and resources of management and directors
• Diverse constituencies, often with competing interests
• Information overload and reliance on traditional approaches, which maintain the status quo of the private-company processes.

One of the critical and fundamental challenges that should be considered by companies during an IPO transition is determining the delineation of responsibilities between management and the board. Consideration of these differences will allow the company to address not only required responsibilities, but more importantly, those beyond compliance, such as activities that encourage shareholder value.

Broadly speaking, board responsibilities include:

• Board leadership structure
• Executive talent management
• Strategy and risk assessment
• Corporate culture enhancement and tone at the top
• Financial oversight

Conversely, management’s governance responsibilities, which the board must understand and oversee, include:

• Risk management and internal controls
• Ethics and compliance programs
• Strategic execution and financial performance
• Transparency and stakeholder relations.

Addressing these challenges, as well as those that are company and industry specific, such as the need for a board-level risk committee for certain financial public companies, will serve companies well as the consideration of these barriers is of utter importance in IPO readiness efforts. Companies should create a common methodology for the design, assessment, and continual monitoring of their governance programs.

Planning for the Transition 

Companies should carefully develop a plan that recognizes potential weaknesses in their corporate governance structure and assists companies in responding to those challenges with thoughtful and responsive actions.

One area for companies to consider is the requirements set forth by the exchange on which they are seeking listing. Companies should familiarize themselves with these listing exchange requirements, as well as with the regulations of other regulatory bodies.

In addition to exchange listing considerations, companies should consider a variety of other governance topics to help to facilitate a smooth transition to becoming public. The following are some of the more prominent topics for consideration.

• Governance Structure: Develop or revise the governance structure, including deciding on the leadership model and establishing board committees, whether those are required by regulation or otherwise necessary to maximize the effectiveness of governance processes and practices.
• Director Recruitment Process: Create a director recruitment process, which may be supported by the development of a board and committee composition skills matrix and briefing materials for prospective candidates (board composition matrices assist in identifying the desired skills and competencies of the board, relative to existing and prospective directors).
• Management Infrastructure: Appoint a corporate secretary and investor relations director, and establish the support network for these positions.
• Board Administration: Develop a calendar of board meetings, meeting agenda items, and communication protocols.

Developing a plan and evaluation of these considerations is only the beginning in a successful transition. Ongoing activities, such as the development and communication of long-term goals with relevant milestones, the monitoring and evaluation of the corporate governance structure, and continuing education opportunities for directors will help to sustain an effective corporate governance structure.

Proper implementation of these considerations may result in an appropriately structured board and required committees, a formal director recruiting and development strategy, a streamlined governance process, a clear understanding of oversight roles for core board activities, and a disciplined internal process to ensure flow of key information to the board.

Concluding Thoughts 

Sound governance is vital to any business organization, but it becomes increasingly important to the company and stakeholders as a company makes the transition from private to public. To succeed in today’s environment, and particularly in light of the various recent corporate governance reforms, it is imperative for companies to take care in establishing and embracing sound governance policies and structures. Properly designed and implemented, they can play a crucial role in the successful transition of a private company into a well-performing public company.

For further information about governance considerations in IPO situations, visit the Strategies for Going Public section of the Center for Corporate Governance Web site.