Outlines Different Governance Approaches and Key Considerations for Pre-Public Companies
NEW YORK, April 22, 2013 – With corporate governance being one item pre-public companies rarely pay sufficient attention to, PwC U.S. today releases two new reports to help companies that are contemplating public offerings. The first, entitled Going Public? Five Governance Factors to Focus On, outlines key governance considerations companies should address when pursuing a public offering. Its companion document, Governance for Companies Going Public - What Works best™, guides directors and executives of companies planning an IPO through the many governance decisions necessary; offers insights from interviews with directors, executives, investors and board advisors; reports results of PwC’s proprietary research on pre-and post-IPO governance structures; and helps those involved understand the governance landscape.
“Ongoing regulatory and investor scrutiny of corporate governance structures and approaches is impacting companies of all shapes and sizes, including new issuers,” said Mike Gould, a partner in PwC’s Deals practice. “When a company embarks on an IPO, management faces a multitude of responsibilities in a condensed period of time, and governance questions can overwhelm boards and executives if they aren’t prepared to handle the many layers of governance planning. As a result, governance decisions get put on the back-burner, creating unnecessary risk. Given the many rules and requirements facing boards, along with increasing shareholder demands, governance decisions for both ‘going public and being public’ merit early attention and consideration. Addressing these issues early and thoughtfully might even make the company look more attractive—if not to potential initial investors, at least to subsequent investors. And that could impact a company’s valuation and the benefits of its public debut.”
The five key governance considerations detailed in the PwC Going Public? Five Governance Factors to Focus On report include:
1) Understanding the Requirements
Companies are subject to many requirements that impact their board composition and governance practices, as well as the structure, composition and roles of board committees. These include SEC requirements for audit and compensation committees’ independence, authority and responsibilities. The SEC also requires specific proxy disclosures describing directors’ skills and experience and how the board oversees risk, establishes board leadership and considers its diversity. The stock exchanges have specific governance requirements for their listed companies as well. Some of these governance requirements—such as the responsibilities placed on audit committees— differ substantially based on the exchange the company lists on.
2) Evaluating Board Composition
Some governance requirements impact board composition, driving pre-IPO companies to consider how many directors are independent, for example. “Although the stock exchanges allow a transition period to meet the board and committee independence requirements, many companies going public don’t use the transition periods, perhaps wanting to demonstrate their commitment to good governance,” said Catherine Bromilow, a Partner in PwC’s Center for Board Governance. Based on an analysis of 50 companies in PwC’s IPO study, 56 percent of directors were independent at the time of the IPO, rising to 68 percent in their 2012 proxy statements. What often gets less consideration is how directors can add value by providing management with valuable advice aimed at making effective decisions. In making the transition to becoming a public company, companies should consider whether additional skills, experience or diversity on their board would be beneficial. “There’s growing emphasis on directors’ skills and the diversity of board members, which may help build credibility with investors,” Bromilow added. PwC’s IPO study found that 40 percent of companies identified at least one women director in their final S-1 and 48 percent did so in their 2012 proxy.
3) Understanding Shareholder and Other Influences
Companies often find that the investors who buy at the time of the IPO don’t hold the shares over the long term. As a company’s shareholder base changes, different shareholders will bring differing investment parameters, company performance expectations and perspectives on governance practices. It’s important for companies going public to understand early on what their potential institutional investors want, and what kind of influence and preferences proxy advisory firms have for various governance structures. Although companies need to make the governance decisions that are right for their particular facts and circumstances, understanding how key stakeholders will perceive them is important input into those decisions. Investor relations personnel can play a central role in communicating with shareholders and proxy advisors. According to PwC’s 2012 Annual Corporate Directors Survey, 31 percent of directors responded that they believe proxy advisory firms influence more than 30 percent of shares voted.
4) Reviewing Governance Choices and Implications
While there are a number of governance requirements, companies also have a great deal of discretion on many governance decisions. Examples include whether to combine or split board chair and CEO roles; whether to elect all directors or only a portion of the board every year; whether to have plurality or majority voting; and whether to set any term or age limits for directors. When deciding on what approach to take, a company needs to focus on what works best for its circumstances, while being sensitive to what potential shareholders will expect. And companies should recognize that if shareholders are unhappy with governance structures, they may submit proposals in the company’s annual proxy to try to influence changes.
5) Securing the Right Resources
In developing the right governance practices, companies need to determine which resources they need to ensure a smooth process. For smaller, resource-constrained companies it may make sense to initially contract out for some of this assistance. Legal counsel will be needed to develop governing documents, including committee charters, which need to comply with basic requirements from the SEC and the listing exchange. Since charters generally are posted on company websites, they often attract scrutiny. Boards also need support with scheduling meetings and preparing meeting agendas and minutes. This is important work and should reflect careful consideration and documentation. Auditors, compensation consultants, investor relations personnel and proxy solicitation firms are among the many additional resources public companies use.
“By carefully mapping out corporate governance decisions in each of these five areas, management teams can help to avoid unnecessary burdens and questions at the time of the IPO and as a public company,” said Bromilow. “Establishing effective corporate governance should not be an afterthought in the IPO process – it’s an imperative to address when preparing an organization for the public markets.”
For more on PwC’s governance perspective for new issuers, please join PwC’s upcoming web cast, “Today's IPO environment: changing market conditions, new expectations for board members, and what you need to know about MLPs” on Thursday, April 25 from 1-2pm ET. To register, please visit:
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