Corporate Governance: The Number One Concern Of IPO Companies

Pre-IPO companies worry about improving corporate governance

What do private companies about to do an IPO worry about most?  Corporate governance.  That's right -- corporate governance, according to recent polls conducted by KPMG.  64 percent of executives named corporate governance as one of their top three concerns about going public.

Recent events demonstrate that corporate governance is an important issue for public corporations.  For example, a lawsuit demanding changes to British Petroluem's corporate governance practices after the oil spill and the anger over Abercrombie & Fitch buyout of its CEO's private jet perk show how a lack of sound oversight by the board of directors can risk serious damage to the company's reputation.

Why IPO Companies Should Pay Attention to Corporate Governance

However, private companies must also address governance issues.  Private companies should usually allow six to twelve months to prepare for an IPO, especially when it comes to implementing strong governance mechanisms.

Aamir Husain, a partner in KPMG LLP's Transaction Advisory Services practice focused on IPO services, explains that private companies underestimate the importance of selecting the board of directors:

"Often, it's the small details that companies overlook that can cause headaches down the road. For example, while many companies realize that corporate governance is a demanding issue, when selecting board members, many don't consider that an important role for directors is working with management to ensure the right tone at the top for ethics and compliance."

Compliance includes following securities laws and regulations applicable to public companies under the Securities Exchange Act of 1934.

Ethics is much broader.  In thinking about ethics, boards of directors must consider corporate social responsibility, corporate sustainability, and risk management, in particular with respect to reputation risk.  Both BP and Abercrombie & Fitch learned that reputational damage can occur when the board of directors does not go beyond its compliance role.

What Is Your Company Doing To Prepare?

Before thinking about going public or getting acquired, where does your company need to improve its board selection, ethics, compliance, risk management?  What is your company's strategy regarding its corporate governance practices?

Douglas Y. Park

Twitter: @DougYPark

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