Building the ideal pre-IPO board: assembling the right team from scratch brings competitive advantage.

• Author: Hanson, Lee
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

THE INITIAL public offering market is bouncing back as global economies recover. In 2010 U.S. IPO volumes soared to over 150, raising over $35 billion. This volume represents an increase in both volume and valuation from 2009 and 2008 numbers. This increase was led by financial sponsor-backed offerings as well as an influx in international participation. And 2011 is off to a strong start in the IPO market, but only time will tell if the market-impacting events from around the globe will slow the pace of filings here in the U.S.

Preparing for an IPO, companies and their investors must build a number of new capabilities in order to maximize shareholder value and meet market expectations. But for a company approaching the public markets, thoughtful board selection is perhaps the smartest move they can make.

The opportunity to build a board de novo is a competitive advantage for a pre-IPO company because it adds essential skill sets to a budding company. Tapping the right team at the start builds confidence among staff, stakeholders, and investors. A strong board arms a company for the heightened scrutiny public companies face.

Pressure is also rising to comply with recent SEC rules on board compensation, diversity, and conflict-of-interest issues. Specifically, the rules stipulate that prior to their appointment, new directors should have no direct or indirectties to a company that imply a conflict of interest, and that great effort be taken to achieve a balance of gender, race, and industry experience on a board.

The SEC, and many global exchanges, require that at least one audit committee member be considered a qualified financial expert. Boards are also mandated by some exchanges to have independent audit, nominating/corporate governance, and compensation committees. Today's companies--particularly those backed by private equity--are seeking significant audit, legal, regulatory, or CFO experience in their new board members.

Adding members to any board can be a difficult undertaking, but building a board in a pre-IPO situation can be daunting for any company. The pressure to get the initial board members in place quickly to satisfy initial filings, while mapping out what the entire board will look like, can impact how a company is viewed in the marketplace.

The skills mosaic

While the skill sets needed by most pre-IPO boards are the same as those we typically look for in established boards--financial skills, international skills, operating...