PwC U.S. recently released two reports on corporate governance considerations relating to public offerings. The first, titled “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 assists those involved understand the governance landscape.
The five key governance considerations detailed in the report titled “Going Public? Five Governance Factors to Focus on” include:
1) Understand the basic governance requirements that will apply to you
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 differ substantially based on the exchange the company lists on. For example, audit committees at NYSE-listed companies have to oversee compliance with laws and regulations, discuss company risk assessment and risk management policies, and discuss the earnings press releases and other financial information and earnings guidance provided to analysts and rating agencies. The NYSE requires boards to have audit, compensation, and nominating/ governance committees. It also requires these three committees and the full board to assess their performance every year.
2) Consider what changes you need to make to your 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 meets these requirements before the IPO, perhaps to demonstrate their commitment to good 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. A consideration that often gets less attention 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. 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) Understand the potential shareholder mix you will have and the role of others who influence governance at public companies
Companies often find that the investors who buy at the time of the IPO do not 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 is 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. Proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis play a central role in proxy season voting. They analyze company proxies and make recommendations on how institutional investors (who subscribe to their services) should vote. 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) Understand your key governance choices and the implications of those choices
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. Another aspect of shareholder voting has implications for companies. On a number of items, including director elections and the say on pay votes, brokers can no longer vote proxies unless they have specific instructions from the shareholders on whose behalf they hold shares. Thus, one historical source of likely support for the company’s proposals no longer exists. That means public companies may need to think differently about reaching out to shareholders, especially retail shareholders, to encourage them to vote.
5) Get resources and support to put your needed governance processes into place
Companies need to determine which resources they need to develop the right governance practices. For smaller, resource-constrained companies it may make sense to initially contract out for some of this assistance. As the company matures and grows, bringing the skills in house may make sense. 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.