Market Insight

Transformative Governance Practices for Public Company Readiness

November 30, 2021

Gain time and value down the road by structuring your board from the start. Global markets achieved equity issuance peaks in 2020despite extreme volatility from a global pandemic and unstable economic, geopolitical, and social conditions. 2021 has continued to set records despite the persistent headwinds of the pandemic and massive global supply chain disruptions. The booming 20s of the 21st century have already seen record IPOs. Prior to 2020, companies seemed to be fleeing the public markets, but the surge in SPACs that provided a faster and simpler path for many companies, helped drive the public market growth in an environment ripe with opportunity. Established companies that have weathered the storm, as well as newly formed companies born out of innovation, can take advantage of these positive market conditions. These companies should consider how to best prepare for entry into the public markets by having a business that is attractive to investors and consumers. The best situated and competitive companies should be built on principles of sustainability and resiliency, as well as healthy corporate governance structures and practices.

Companies in their early existence may be focused on establishing their purpose and strategy, acquiring the tools and resources to operate effectively, and building the right team. Typically, companies begin to think seriously about their corporate governance systems approximately three years prior to the IPO.

Shortly thereafter, companies hire a general counsel who is responsible for understanding the legal requirements for their governance structures and practices. General counsel can help the board and CEO understand the legal and regulatory requirements of governance and the dynamic elements that improve board effectiveness.

Governance Structure and Composition

People and structure are important at every level of a company.

Board Independence

Effective oversight is built upon having a board that can act independently in upholding its fiduciary duties and protecting the interests of the company’s stakeholders. There are increased requirements for board independence as a company is preparing to, or has transitioned to,become a public company.

The stock exchange will likely have requirements about the balance of independent directors on boards. The general counsel can play a key role in helping the board and management team understand the requirements and how the board’s level of independence allows it to effectively make decisions and ensure systems of controls and accountability. The balance of independent directors versus non-independent directors will also impact investors’ perceptions of the governance structure, decision-making authority, and processes—all of which help ensure the company operations are efficient, profitable, and compliant.

Another important element is driven by the board’s leadership structure. Public companies’ views on the separation of the board chair and CEO roles are split. However, utilizing a lead independent director has increased in recent years, especially when the board chair and CEO roles are combined.

The independent board leader is often someone who has significant board experience, serves as a mentor to other directors and the CEO, and provides perspectives and education on best governance practices for public companies. This leader is responsible for relaying the perspectives of the independent directors to the CEO and fostering accountability for performance.

Ensuring the board structure has independent leadership is important for different reasons. Independent board leadership can help drive an effective agenda focused on matters relevant to shareholder value. This can provide a healthy balance with management’s focus on achieving short-term growth and performance, which is often present in newly public companies in a period of accelerated growth. It also ensures decisions are thoroughly vetted and that consensus is achieved, including important decisions that arise early in a public company’s tenure.

Board Composition

A board’s composition indicates the company’s understanding and value of effective corporate governance. Board composition that’s well-aligned to the company’s business and life-cycle signals confidence to stakeholders about the board’s effective oversight capabilities. Further, it signals that the board is focused on understanding investors’ priorities and protecting their investments. To maintain well-balanced board composition, it’s important to assess what skills and experience are needed and plan to recruit and retain directors.  

A company’s board, CEO, and general counsel should be thinking about board composition over the course of the next five years. Consider what the board will need as it transitions to being a public company and grows during those pivotal first few years. Boards that conduct a gap analysis can be strategic in aligning director skills to the company’s needs. They can think holistically about board composition and consider the many facets of director expertise, diversity, and experience that allows the company to have the best built board for where it is and where it needs to go. This also allows the board to consider and meet stakeholder demands for diversity characteristics in directors, which will be important in setting the tone for understanding and considering these perspectives as the they continue to evolve over time.

By developing proactive succession planning from the start of the public company readiness period, the board will be able to manage sponsor-backed directors’ departures. This promotesstability through intentional transitions. Moreover, this helps prevent the board from experiencing abrupt transitions that may be disruptive to board functioning and culture.

Culture should be a core consideration of the board’s succession planning efforts. To determine if board candidates would work well with other directors and the management team, consider whether or not their personalities and characteristics align to the company’s values and norms. The value of directors’ expertise and experiences are amplified in environments that are healthy and inclusive and focused on the same goals.

Committee Structure

In addition to establishing required committees, such as the audit, compensation, and nominatingand governance committees, the board and general counsel should determine other areas of oversight that would benefit from a committee’s delegation of responsibilities.

Special committees are often driven from the business’s complexity, sector, strategy, risks, and priorities. Special committees, whether standing or ad hoc, can help ensure the board is dedicating appropriate attention to important business matters and streamlining processes. Thiscommittee structure allows directors to leverage their expertise and experience, work with other directors and the management team, and provide more value to the board and the company.

Board Practices

Once board composition and committee structures are established, the board should develop practices and leverage tools that support effectiveness—instead of doing so on an ad hoc basis,which may create consternation or inefficiency down the road. While implementation may vary by company, the following practices will help companies meet their corporate governance needs.  

Agenda Development and Meeting Management

Boards generally have limited time together throughout the year, which is why it’s important to use time strategically and focus on legally mandated responsibilities, as well as opportunities and risks relevant to corporate sustainability and shareholder value. To help the board, CEO, and general counsel maximize their time, they may want to ask the questions:

Who is responsible for developing the board meeting agenda topics?

The responsibility is typically split between the CEO and the board’s independent leader. They should work together and consider:

• Establishing a cadence to discuss potential board meeting agenda topics.

• Consulting with the general counsel to ensure legally mandated items, such as reviews of related party transactions or material regulatory disclosures, are slated for board review.

• Gathering input from directors on topics of importance, which may help avoid a common director complaint regarding board meeting agendas lacking topics they deem important.

How will the board ensure it makes the best use of its time in meetings?

The board chair is responsible for ensuring the board makes efficient and effective use of itstime. The chair, CEO, and general counsel map out time for each presentation and discussion versus having the list of agenda items, which runs the risk of reaching the end of the scheduled meeting time but with multiple items left to cover. To ensure timely presentations, connect with presenters in advance of the meeting to discuss expectations and allocated time.

The board chair and CEO may consider using the general counsel as a partner for in-meeting time management. Therefore, the general counsel is tasked with holding presenters accountable to their timeslot and providing the board chair and CEO with a periodic time check as the board moves through the meeting agenda. This allows the board chair and CEO to gauge the room andmove topics along or provide the board with more time for discussion when necessary.

How will the board ensure actions and areas for follow-up are documented and acted upon?

There are established requirements for board minutes to document board meetings and actions; however, the form and style vary. The general counsel can provide the board with advisement on establishing the appropriate form and substance to meet legal record requirements.  

Beyond those areas that must be incorporated in the minutes, the board often identifies other areas for future review and consideration that would not commonly be documented in board minutes. The general counsel can be a key partner in listening for those suggestions from directors and directives from the board on follow-up areas. Following the board meeting, the general counsel can meet with the board chair and CEO to discuss these items and agree upon timing and next steps for each. These items may inform the agenda setting process for the next meeting or be shared with the board between meetings.

Leveraging a centralized tool tied to the board meeting agenda, like a board portal, can help prepmeeting minutes, track actions, and record and monitor progress on those ongoing action areas.Moreover, a board portal can be a key arrow in the quiver for a sharp general counsel.

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