Implementing Strong Corporate Governance Pre-IPO

  • Carissa Duenas
  • Published: February 24, 2022
Implementing Strong Corporate Governance Pre-IPO

The colossal collapse of firms such as Enron, Tyco, and Worldcom in the early 2000s was a lesson on the need and importance for strong corporate governance. It was an inflection point and wake-up call for listed companies, most especially, to understand the depth and breadth of the consequences involved when good governance falls by the wayside.

Start-ups and early-stage private businesses are perceived to have the luxury of instituting good governance frameworks at later phases of growth. This is partly due to the fact that their processes and priorities are often oriented towards agility and flexibility in decision-making and quick strategic execution. Board and management structures are also smaller and simpler which still allows for a transparent flow of information. 

But as they choose to scale and raise capital through an IPO, they will have to implement and adopt a corporate governance framework that reflects their readiness to operate as a publicly-listed entity.

THREE MAJOR BENEFITS OF STRONG GOVERNANCE PRE-IPO

Apart from satisfying listing requirements, there are a number of benefits to embedding good governance practices for pre-IPO companies.

1. Establishes Good Organisational Culture

Perhaps an example of how poor governance can impact corporate culture and affect its long-term financial prospects is the case of Uber Technologies. Uber became notorious after widespread allegations of its hostile and discriminatory work culture, non-compliance issues, problems with labour organisations, to cite a few. The reputational damage was great and had a significant impact on the timing of their IPO, which had to be delayed. 

The case of Uber highlights that strong corporate governance keeps companies in check — allowing them to make ethical decisions that benefit and align with the interests of stakeholders. It is an important component of the firm’s ability to stay profitable, accelerate growth and satisfy customers. All of which impact a company’s ability to deliver on their strategy.

2. Increases Investor Confidence

Pre-IPO companies who have systems and processes of good governance provide assurance to prospective investors. It delivers the message that shareholders are valued as owners and that the firm operates responsibly. It signals a corporate maturity that will allow them to meet governance expectations required of publicly-listed companies.

3. Improves Ability to Execute Long-Term Strategies

Even if companies decide to defer or abandon their plans of going public, strong governance principles place them in a better situation to execute their long-term strategies. Some notable benefits to implementing broader governance frameworks include “significant bottomline benefits, better credit ratings, increased access to capital, improvements in operational efficiency, and reduced risk.”

TWO ESSENTIAL COMPONENTS FOR STRONG CORPORATE GOVERNANCE PRE-IPO

To reiterate, an effective corporate governance system needs to be in place as companies scale. But what are the essential building blocks and pillars for a good corporate governance framework pre-IPO? We discuss two important ones below.

1. Effective Board of Directors

Establishing an independent-minded, strategic-oriented, high-calibre board is crucial for pre-IPO companies.

To build an effective and well-functioning board pre-IPO, the following factors must be considered:

1a.) Independent Directors or Non-Executive Directors (NEDs)

As businesses grow, it serves the company well to appoint independent directors or NEDs. These directors have the ability to see the “forest for the trees,” which allows them to constructively challenge the performance of management and the firm.

Boards turn to their expertise, experience, and wisdom to help steer the strategic ship of the company. The sooner or earlier their involvement in key governance decisions, the better. Their objective input can help ensure that the firm is better equipped to flourish as a public company.

1b.) Audit Committee

A formal and dedicated audit committee tasked with overseeing internal audits, systems, controls and processes and investigations will help the firm identify areas of non-compliance. This mitigates risk and prevents fraud and corporate violations which could result in financial, operational, and reputational damage.

1c.) Board Systems and Processes

Pre-IPO boards should have good governance principles embedded into their processes. Ideally, their workflow and administrative processes should be professional, compliant and organised.  

It is important that board affairs are in order. 

Many pre-IPO boards have turned to board applications, such as board management software or board portals, to help in this regard. From digital, paperless board packs to electronic voting, board portals can embed sound and secure governance practices into typical board workflows so that boards can execute their governance responsibilities efficiently and effectively.

1d.) Board Dynamics

Healthy board dynamics can prevent the scenario of having minimally engaged boards and breakdowns in board performance. The responsibility of setting the tone for the board culture primarily falls on the shoulders of the Chair. The Chair is both observer and participant when it comes to ensuring that board values are upheld and practised. 

The importance of well-run board meetings can’t be downplayed (again, an area the Chair is largely responsible for). Effective board meetings can improve governance. Poor meeting dynamics can jeopardise strategic governance. The company doesn’t benefit from the board’s collective experience and wisdom.

2. Robust Internal and Financial Control Systems

Smaller private companies don’t usually invest enough in developing financial and internal control systems. They typically look at these controls from the perspective of supporting operations and for generating financial statements required by authorities.

But these control systems will undergo greater scrutiny when they list. It works in the favour of pre-IPO companies to:

  1. Hire a Chief Financial Officer (CFO) who has the expertise of instituting corporate governance practices in addition to the experience of taking a company public 
  2. Implement broader internal control systems (e.g. hiring an audit head to oversee financial and operational controls) in proportion to that of the changing size of company operations
  3. Work with a reputable audit firm to audit the financial statements of the business to establish compliance, transparency, and credibility

CONCLUSION

Implementing strong corporate governance is by no means a simple or easy task. But it becomes obvious that treating good governance as a “one-off”/one-time initiative or a “nice-to-have” can be short-sighted. The reality is that good corporate governance enhances the well-being of the company and optimises the long-term value of going public.