Going public? Consider some pre-IPO board governance leading practices

By Maureen Bujno, Managing Director, Audit & Assurance Governance Leader and Governance Services Leader, Center for Board Effectiveness, Deloitte & Touche LLP

Talking points

• Transitioning from a private company to a public one is an exciting step in a company’s evolution.
• Following leading practices for board composition, structure, and governance policy can help you create an effective and connected governance framework.
• Although there are governance requirements that need to be met on Day 1 as a public company, others allow for a transition period post-IPO; effective governance is a continuous journey.

The latest US IPO market numbers are in, and the Q1 2024 data looks promising. After nearly two years in the doldrums, the number of US IPOs increased to 43 from 34 for the previous quarter, with deal value more than tripling to $6.2 billion from $2 billion.¹ Could this be the start of a sustained upward trend?

While a quarterly upturn can be cause for optimism, we know that preparing to go public often takes longer than a quarterly market cycle. The IPO readiness process could take anywhere from six to 18 months of intensive planning, and building your governance foundation is an important part of this pre-IPO preparation. My advice to clients going through this process doesn’t change based on market conditions. I tell them: Don’t delay; start early because there’s a lot to do in a compact window.

Pre-IPO governance planning is just one workstream in the interconnected readiness process. When a company prepares for the public markets, it can establish a governance framework that evolves effectively over time by focusing on three priorities: board composition, board structure, and governance policies and practices. How should you address each? Here are some leading practices to consider.

Board composition: Shaping your board for public company operation

The IPO governance process typically begins with shaping your board of directors to meet the requirements of operating as a public company. Key considerations in the process include:

• Establishing an effective recruiting process to build a quality candidate pipeline.
• Composing a board with skill sets aligned to company strategy and goals.
• Adapting the size of the board to staff the required committees.
• Meeting rising board diversity requirements.
• Continually refreshing the board using a board matrix.

Recruiting—the thread that runs through most of these considerations—demands a great deal of thought and planning. Board members typically serve in their roles for many years. Conducting the required due diligence to find board members with skills that align to the company’s strategy as well as members who fit into the board (and company) culture can take time; and it will serve your company well to vet a broad slate of candidates. In addition, companies should be prepared to meet any respective regulatory, exchange, state, investor, underwriter, and other stakeholder expectations.

Refining your board structure

Board structure goes hand in hand with board composition. Most public companies in the United States are required to have three standing committees of the board: Audit, Compensation, and Nominating/Governance. However, requirements differ by listing exchange, and there may be exemptions to this structure depending on several factors.

The role of each committee is documented in a formal committee charter; each committee may have Securities and Exchange Commission (SEC) and listing exchange requirements to consider. The board committee structure allows the full board to focus on monitoring the execution of the strategy while other specific topics can be presented at a deeper level in committee meetings (e.g., a deep dive on financial performance or specific risks).

Formalizing leading governance policies and practices

As you continue to put the new board and related governance committee structure in place, formalizing your governance policies and practices should be a top priority. This process includes defining corporate governance guidelines and policies; establishing a board calendar that sets meeting dates; and starting the collaborative board-management process for creating board meeting packages, agendas, pre-read materials, and communication policies. Understanding the shareholder/proxy advisor landscape and role of the board as a governing body are also important considerations.

Although many of these requirements must be in place on Day 1 as a public company, others may be met over time. Keep in mind that establishing corporate governance practices is a journey, and there may be a transition period for meeting some of the requirements. Even with the best preparation, it may take time to adjust to the new level of scrutiny from the SEC and investors.

What role can Deloitte play?

Deloitte’s Center for Board Effectiveness can advise on how to navigate the demands of corporate governance IPO readiness. We can help you connect your governance preparation to other IPO readiness workstreams, so they don’t become siloed. I encourage you to visit our website, use our IPO SelfAssess™ tool, and reach out to me with any questions.

Endnote

1. Deloitte analysis of Stock Statistics data as of March 31, 2024.