Proper corporate governance can reportedly be one of the most difficult challenges companies face when preparing for a micro-cap initial public offering (IPO).
It can be a crucial part of the IPO process and imperative to operate as a legally compliant and sustainable public company. Governance requires processes, systems and controls to ensure the effective and efficient use of resources to enable an organization to achieve its goals and objectives.
Some may note that countless startups and entrepreneurial companies have operated and thrived with limited governance. This is particularly common in a founder-managed company. The new requirements and transition to public company governance can be overwhelming for the management team, and implementing new processes is time-consuming when external party reviews and approvals are required, which can constrain or slow down corporate actions and cultures.
Is it possible to update corporate governance before becoming a public company? It is! The establishment of a public corporate governance and board of directors should ideally begin about a year before the IPO date. Begin by filling the two most important roles – audit and compensation committee chairs – as they are required to operate as a public company.
Each committee of the board must establish a number of procedures and processes, and it is best to establish these processes with sufficient time for committees to become familiar with their roles and begin regular meetings as soon as possible.
The corporate governance mindset
Done right, good governance can help improve organizational effectiveness, efficiency and value. However, implementing governance requires systems, controls and an appropriate mindset. Monitoring governance and corporate culture is time-consuming, and aligning with the mindset of being a well-run public company requires commitment from senior management.
This change in mindset often involves the integration of systems for third parties to assess and review your business and confirm that corporate governance certification practices are in place prior to the IPO date.
Good governance also requires several concrete processes to be put in place by the CEO to achieve the enhanced transparency that good governance provides.
These processes include:
- Accounting and compliant financial reporting
- Information technology systems and processes
- Board operations and decision making
- Timely disclosure of material information consistent with the Securities Exchange Commission (SEC) and stock exchange rules
Board Governance and Selection
Selecting the best board members can be critical to the company’s success. You may need specific skills and background to add serious value to the business. Large-cap expertise often doesn’t translate accurately to the microcap ecosystem, so it’s often recommended to look out for those that best fit your business. As a company approaches an IPO, it may also be beneficial to hire one or more directors with public company experience.
Engaged, value-added board members are what every shareholder, officer and director should embrace. They also need the right cultural fit and values to set the tone at the helm of the business, which in turn helps ensure proper governance throughout.
Board actions should include setting ethical and operational standards and encouraging engagement from other board members and senior management. For board members, these standards are the basis for recruitment and retention on the board and affiliation with the company.
Even CEOs who are highly attuned to corporate culture can have limited understanding and experience of corporate governance. Attributes of appropriate board conduct should include independence and required experience and skills to help the firm determine both board suitability and which committee each new director should belong to.
Boards of directors can be a competitive advantage for the CEO and a win for shareholders when done right with the right people at the table.
Accounting and Financial Reporting
Good financial accounting and reporting processes are the basis of proper corporate governance. This includes metrics and reports on compliance and managing business performance.
The process of implementing accounting, financial reporting and governance should not be an afterthought. It should arguably be part of starting your business – well before the IPO. This foundation begins with documenting every process in accounting, how account reconciliations take place, and who reviews them.
Introducing these processes early in a fast-growing organization can prevent things from getting out of hand, which can often happen very quickly. The best approach to your IPO corporate governance is to set up accounting and financial reporting from the start as if your company were already public.
The sooner you put these processes in place, the more time everyone has to adjust to the change. Every company, whether private or public, must make annual filings. Filing is required quarterly and annually for public companies.
The SEC sets mandatory deadlines, and adjusting to filing on a specific schedule can be a huge learning curve and challenge for micro-cap companies. Good governance applies here, and with the right people, processes, and team alignment, these submissions can be better organized to complete them on time.
Having the right people in place to get accurate numbers promptly drives the accounting and governance systems you need to put in place internally. Finding the right external legal and audit support for compliance needs and ensuring a proper review will be a driving force of your business as a public body.
Implementing strong corporate governance practices can be incremental and usually begins with the senior leadership team. The new board and each committee should establish and regularly review the relevant bylaws or mandates (TOR) and board policies. This step in the IPO journey is one of the most difficult and critical, but can signal a stroke of luck after it’s implemented and corporate governance begins to work its magic.
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