Activating an IPO board.

• Author: Rock, Robert H.
• Position: Initial public offering - Letter from the Chairman

For the past three years, the initial public offering market has been hot, sometimes white hot, and a steady stream of new registrations continue to be filed. Last year, 619 U.S. companies went public, raising $45 billion. In 1995, it appears at least another 600 will follow.

Entrepreneurs decide to go public for a variety of personal and financial reasons, such as funding growth plans, creating personal liquidity, and executing estate planning. Often an IPO is the ultimate dream of an entrepreneur. To avoid having this dream dissolve into wishful thinking or, worse, disintegrate into a nightmare, an entrepreneur must prepare well in advance for the substantive and stylistic changes that public ownership will necessitate. Frequently, one of the biggest changes involves activating a board of directors.

In terms of their boards, private companies tend to be insider dominated. If there are some outsiders, they are usually investors and friends. When going public, the private company needs to recruit outside directors to satisfy the listing requirements of the stock exchanges. The choice of these outside board members can be critical to the growth and development of a young company. These directors can provide not only contacts and expertise but credibility. In fact, recruiting qualified outside board members can indicate whether a company is a viable IPO candidate.

In preparation for the post-IPO environment, an entrepreneur needs to recruit board members who are willing to participate in the more formalized and rigorous governance process of a public company. When performing the search, the entrepreneur should look beyond investors, family, and friends for outside directors who have the personal strength and self-confidence to constructively counsel and challenge the CEO and management. Independent directors can provide advice free both from the corporate politics constraining internal-management directors and from the special interests influencing family-member directors.

Of course, these outside directors should possess not only independence but also the requisite competence, integrity and experience to...