Establish Effective Corporate Governance for IPO Success

Part 4 of 5 of How to Have a Successful IPO and Beyond

The public market doesn’t reflect kindly on organizations that can’t effectively govern themselves or have a lot of internal infighting. Companies considering IPOs must establish a corporate governance framework that keeps board members and executive management accountable and sets the tone that there is alignment with investors.

Many private companies don’t fully understand the importance that governance plays in long-term success, and those who do make governance a priority often underestimate the time and effort required to establish it effectively. The fiduciary role keeps coming up from frustrated investors so setting the right framework from the start can prevent a lot of future headaches.

Think about Nelson Peltz, Starboard, Pershing Square, Carl Icahn, and others who will zero in and remove board members if things are not going well. It’s a segway but here is an interesting article from Harvard Law on activism:

When a company goes public, regulators and investors alike demand that it be coordinated, transparent, and consistent, unlike the loose policies that may prevail in many private companies. In the public equity markets, governance is not optional, and each director and C-level executive must understand exactly how they relate to one another as well as to the organization and its stakeholders.

Establishing good investor relations and corporate governance is crucial for a company preparing for an IPO to build trust among investors, attract capital, and ensure long-term success. Here are some key steps and examples to effectively establish a strong governance framework:

Board Composition and Structure: Don’t Have All Your Buddies

Ensure a balanced board composition with a mix of independent directors, industry experts, and experienced executives. Sometimes we see an overweight of VC board members which then causes some concern about VC selling pressure by institutional investors. Something to think about in terms of balance now and balance in the future.
Clearly define the roles and responsibilities of board members, including the separation of Chairman and CEO roles. (this is not easy for Founder situations).
Appoint independent directors with diverse backgrounds in finance, technology, and legal sectors to provide well-rounded expertise.

Here are the specifics related to an audit committee member from the SEC:

Transparency and Reporting: Enough Information for IPO Investors

Develop robust financial reporting practices that adhere to generally accepted accounting principles (GAAP). Restatements or accounting issues are big, big problems so do invest in making sure that things are ship-shape with your numbers.
Regularly communicate financial results, strategic initiatives, and potential risks to shareholders.
Yes, you will do quarterly earnings calls, and you have to prepare, prepare, and overprepare. Ensure solid financial statements along with comprehensive management discussions and analysis are ready to go and make sure to have a proper sequence of getting your 10Q filed at the time of your call (usually together with earnings release or the day after). The 10K of course takes a little longer.

Code of Ethics and Conduct

Establish a comprehensive code of ethics and conduct that outlines expected behaviours for all employees, including board members and executives.
Implement mechanisms for reporting and addressing ethics violations or conflicts of interest.
Usually, it’s after a bad episode that companies create an ethics panel. Be proactive and have a whistleblower hotline and an independent ethics committee to regularly provide the right tone investigate reported violations and ensure compliance.

Avoiding the Infighting

Here’s a list of companies where you can say the board became quite dysfunctional or there was a lot of disagreements:

Risk Management and Oversight: Rely on COSO

Create a risk management framework to identify, assess, and mitigate risks that could impact the company’s performance and reputation.

Form a risk committee within the board to regularly review and address risk-related matters.

We recommend reviewing regular risk assessments and presenting findings to the risk committee, which then advises the board on risk mitigation strategies.

We often use the COSO framework as a reference guide:

Compensation and Incentives: Alignment with Shareholders

Design executive compensation packages aligned with long-term company performance and shareholder value.

I mean $110 Million is nice, but it’s a little much for a company with struggles. (CS Disco)

Disclose executive compensation details to shareholders and ensure transparency in the decision-making process. Here are the requirements from the SEC.

Company EFG links executive bonuses to both short-term financial targets and long-term growth objectives, with a significant portion of compensation in stock options.

Additional guidance can be found from Glass Lewis which has a long-standing guide on these issues:

Shareholder Engagement: Be Known to be friendly

Foster positive relationships with shareholders by providing opportunities for engagement and dialogue. No need to be antagonistic to shareholders who can build a sizable position in the company.
Share information on company strategy, financial and accounts performance, and significant decisions with shareholders.
Host regular investor conferences and webcasts to keep shareholders informed and engaged. What works well is combining customer days and bolting on an investor day so investors can see the excitement at the event.

Board Committees: Breath and Depth

Establish specialized board committees, such as audit, compensation, and nominating/governance committees, to ensure thorough oversight and expertise in critical areas.
Clearly define the responsibilities and composition of each committee.
Your audit committee must have financial experts who review the accuracy and integrity of financial statements and are typically other CFOs (or retired CFOs).

Long-Term Strategy: Beyond the Quarter…And the End Game

Develop a clear and well-defined long-term business strategy that aligns with the company’s mission and values.
Regularly review and update the strategic plan, taking into account changing market conditions and competitive landscape.
Also, the question often asked by investors is what’s the end game…everyone wants to be dominant so it’s about articulation of which markets, TAM expansion, potential exits, and scaling into the future…all with proper alignment within the board and the organization.

Companies can establish a strong governance framework that aligns with the expectations of regulators, investors, and stakeholders, it’s sort of table stakes and you want the focus on the growth potential of the company and the valuation expansion instead.

In Part 5, we dive into ” Establish Investor Relations and Corporate Communications“.

Make sure you have not missed anything on this journey of “How to Have a Successful IPO “.