By Liz Dunshee
In today’s market, an initial public offering (IPO) can be an attractive liquidity option – but you have to be ready to price when the moment is right. While the business and management story, financial reporting and disclosure controls are all very important parts of the IPO readiness journey, a strategic approach to corporate governance is also critical. Entering the market with an IPO-ready board and appropriate activist protections can help minimize disruptions and maximize opportunities for aspiring and newly public companies. On the flip side, ignoring corporate governance decision points can leave a company with suboptimal board structures and power balances that may be hard to change.
In a recent “Path to Public” webcast, Cooley’s Brad Goldberg and PwC’s Catie Hall elaborated on this topic. Here are nine takeaways that stood out:
1. Start governance planning early – really early
To list on an exchange such as Nasdaq or the New York Stock Exchange (NYSE), a company must meet specific requirements – often prompting changes to the board of directors and compliance policies in advance of the IPO. This isn’t something you want to scramble through in the final stretch before pricing. The earlier you start, the more time you’ll have to identify and resolve issues, especially around board and audit committee composition. While there is a phase-in compliance period for newly public companies, it is risky to rely on this grace period, as it may send an unwanted signal to the buy side or cause disruptive last-minute reshuffling.
2. Audit committee first
When prioritizing governance tasks, filling the audit committee – and the role of audit committee chair – should be near the top of your list. It can take time to find director candidates who check all the boxes in terms of bandwidth, financial expertise, other relevant skills and cultural fit. Audit committee members must meet more stringent independence requirements, which can be an issue for some late-stage companies with boards consisting of significant investors. Audit committee members must also be financially literate, and at least one of them must be a “financial expert” – i.e., have experience in accounting or financial reporting oversight. New directors also will need time to familiarize themselves with the company and its financial reporting practices before going live. It can be helpful to spend a few quarters running through the motions of being a public company prior to the IPO.
3. Board composition is a strategic conversation
Who stays, who goes and who joins the board as you go public? These are tough conversations, especially with investors who may expect to retain seats or have ongoing board observer rights. As Catie put it, “As the company evolves, the board has to evolve too.” Especially if an IPO is on the table within the next 24 months, the existing directors should begin to consider refreshment and pipeline mechanics. Regular conversations about performance, skill sets and tenure expectations can make turnover less personal. This not only helps avoid distracting disputes and negotiations during an already busy IPO process, it also mitigates the risk of a disgruntled former insider turning into an agitator down the road, and it sets the stage for healthy board assessment and refreshment practices once the company is public.
4. Traditional board skills still carry weight
There is plenty of buzz right now about whether all companies need directors with artificial intelligence (AI) and cybersecurity expertise, but the truth is that investors expect boards to be more than a group of “one-trick ponies.” Specialty skills are valuable, especially if they directly relate to the company’s major strategic opportunities and risks, but someone who can’t engage on financials or strategy may not be able to contribute meaningfully, and a designated “expert” may cause the other directors to afford too much deference to one person’s view. For these reasons, financial, operational and industry expertise are still high priorities, with support from third-party advisors on emerging issues as needed. That said, board composition should be an ongoing conversation – even for established public companies, adding new skill sets can help keep the board aligned with the company’s evolving strategic needs.
5. Plan ahead if you’re thinking of a dual-class structure
In order to preserve control over the company’s strategic direction, founder-led companies often consider stock structures with two or more classes of shares. Because there is no one-size-fits-all approach, it is important to have early conversations about the desired structure, potential complexities, and documentation.
6. Location, location, location – even for incorporation
Delaware has long been the default state for incorporation, but some late-stage companies are taking a second look at Nevada and Texas. These states tout a business-friendly approach to stockholder rights, takeover protections, board duties, litigation processes and more. Among other issues, differences in state law may affect how deals are approved and whether they can be successfully challenged – especially if a controlling stockholder is involved. That means the decision of where to incorporate is no longer a “no brainer” – it deserves thoughtful consideration well in advance of the IPO, and should be determined strategically based on the company’s circumstances.
7. Governance best practices versus IPO reality
Yes, investors love “best practices.” But IPO-stage companies often have good reasons to keep things simple, growing into more sophisticated governance structures over time. There also are usually good reasons to adopt or maintain anti-takeover provisions like classified boards, limitations on special meetings and written consents, and supermajority voting rights. These protections are much easier to include up front, with possible removal down the road, rather than the other way around. Moreover, they can be strategic levers for negotiating with stockholders in the future. Brad made a great point in the webcast that, “if you go out with nothing, then you have nothing to trade.”
8. Use the pre-IPO phase to build infrastructure
The pre-IPO period is your chance to set up structures that public companies often wish they had. Think about how to allocate risk oversight responsibilities among board committees, the cadence of board and committee meetings and agendas, how to handle board education, training the management team to provide streamlined materials, and refining financial reporting practices. Processes, templates and board portals may seem minor, but they can dramatically improve effectiveness and protect confidentiality post-IPO.
9. Leverage advisors for institutional knowledge and expertise
Advisors that have long-term relationships with the company and the board can create a valuable bridge from the pre- to post-IPO periods. In addition to providing institutional knowledge that may be helpful to new directors and serving as a resource on public company issues, they can connect the board and management team to training opportunities and useful resources.
Final thought: Governance is a differentiator
In a selective and rapidly shifting IPO market, a strategic approach to governance can be the difference between getting investor interest or getting passed over. In addition to meeting listing standards when the window is right, it shows you’re ready to operate as a public company – with the transparency, oversight and discipline investors expect.
