The Evolution of Corporate Governance: 2018 Study of Inception to IPO


Pre-IPO governance systems are highly diverse in maturity, rigor, and structure. The SEC dictates public standards, but pre-IPO companies make vastly different choices on when and how to implement.

Newswise — “There is no obvious instruction manual for corporate governance in the pre-IPO world,” says Professor David F. Larcker, Stanford Graduate School of Business. “Pre- IPO companies are incredibly diverse in terms of industry, market opportunity, growth profile, and management experience, and the governance choices they make reflect this diversity. As companies approach IPO, we see them transition from the home-grown processes of the startup world to the standardized systems required by the Securities and Exchange Commission (SEC). Still, the choices they make and the timing of implementation are individually tailored to meet the specific needs of each company. The experience of management and investors, the competitive landscape, funding needs, and the speed to IPO all play a role in influencing how a company goes from essentially ‘no governance’ at inception to the rigorous standards required of publicly traded companies in the U.S.”

“There is no doubt that ‘good governance’ is required of private companies as they prepare for IPO,” adds Brian Tayan, researcher at Stanford Graduate School of Business. “However, the process for implementing good governance is not systematic, and certainly does not follow a predetermined path. Some companies recruit independent directors early; others do so at the last minute. Some have rigorous financial and reporting structures from the inception; others adopt them only as part of the plan to be SEC-compliant. Bottom line: CEOs and founders often figure it out on the fly—with considerable outside advice—while at the same time trying to keep their eye on the main goal of growing and managing the business.”

In summer and fall 2018, the Rock Center for Corporate Governance at Stanford University surveyed 53 founders and CEOs of 47 companies that completed an Initial Public Offering in the U.S. between 2010 and 2018 to understand how corporate governance practices evolve from startup through IPO.

Key findings include the following:

  • Governance systems are put in place primarily as part of a company’s plan to go public.
  • Independent directors are critical to good corporate governance.
  • Outside CEOs are brought in to scale a company, not necessarily take it public. 
  • CFOs are more likely than CEOs to be brought on as part of the IPO process.
  • An internal general counsel is the "least necessary" governance feature. 
  • Compensation does not change as companies approach IPO, but it becomes more formalized after IPO. 
  • Good governance is required; its definition and value are unclear. 

For more details and analysis, click here to view the full report.

 

About Stanford Graduate School of Business and the Rock Center for Corporate Governance

CORPORATE GOVERNANCE RESEARCH INITIATIVE

The Corporate Governance Research Initiative at Stanford Graduate School of Business focuses on research to advance the intellectual understanding of corporate governance, both domestically and abroad. By collaborating with academics and practitioners from the public and private sectors, we seek to generate insights into critical issues and bridge the gap between theory and practice. Our research covers a broad range of topics that include executive compensation, board governance, CEO succession, and proxy voting. gsb.stanford.edu/cgri

THE ROCK CENTER FOR CORPORATE GOVERNANCE

The Arthur and Toni Rembe Rock Center for Corporate Governance is a joint initiative of Stanford Law School and Stanford Graduate School of Business. The center was created to advance the understanding and practice of corporate governance in a cross-disciplinary environment where leading academics, business leaders, policymakers, practitioners, and regulators can meet and work together. rockcenter.stanford.edu

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