Ed. Note: Investors are challenging companies across a wide spectrum of governance practices as their influence in the boardroom grows. EY's Global IPO Center of Excellence and the firm's Centerfor Board Matters collaborated on a report, "Charting the Right Course: Insights on Board Governance for U.S. IPO-Bound Companies," that addresses the impact this influence is having on IPO-bound companies--compelling them to develop plans to respond to these governance expectations. Following is an excerpt from the report that focuses on board composition.
In today's hot market, the path from IPO to an index such as the Russell 3000 can be a short one; some companies make the leap seemingly overnight. Such success is a testament to vision, drive and hard work. And it's a call to action.
A company that moves quickly from offering to a place on an index can face a change in its investor base. The new investors are those who more actively follow the governance practices of their portfolio companies. In particular, they are seeking:
* Independent board leadership
* Annual director elections
* Diversity and independence in board composition
* One share-one vote
For a variety of reasons, IPO companies generally have some distance to travel before attaining what investors would consider maturity when it comes to governance. Some investors may give new IPO companies time for their governance practices to evolve. Companies that can boast of strong financial performance or solid reputation--or, even better, both--also are likely to enjoy some leeway.
The not-so-good news is that financial results and reputations can change, and do so with alarming speed. That's a thought that should give pause to both public companies and those looking to go public soon, because sustaining valuation after the IPO is key. It can take years to make up the ground lost during a post-offering malaise. Companies that work to secure investor confidence early can improve their post-IPO valuation outlook.
One area that has attracted a great deal of investor attention in the past few years is that of board composition. As an IPO company's strategy shifts, so too will the composition of its board.
Investors want to know about the board's skills and experience, and how directors are positioned to help the company grow, compete and take advantage of market opportunities. At the same time, investors have not been shy about their expectations of gender and ethnic diversity, as well as...