Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP 16 | Preparing for IPO Success: The Transition in the Founder's Role and Corporate Culture The Management Shift For private companies, management is typically focused on running the business with attention to regulations specific to that industry. Management is chosen primarily for industry experience and relationships. Public company management is tasked not only with focusing on operations but ensuring compliance with numerous financial and disclosure regulations, working with outside auditors and establishing disclosure controls and procedures. As such, potential investors seek assurance that the post-IPO company will be led by a "proven" management team. Moreover, public company CEOs and CFOs are required to certify as to the appropriateness of the public company's financial statements and disclosures and to certify that they fairly present, in all material respects, the operations and financial condition of the company. They are also required to provide similar assurances to the company auditor. A CFO with significant experience with public company accounting and auditing requirements is essential along with a strong accounting team to help develop, monitor and maintain controls and procedures. Shareholder engagement is another challenge unique to the post-IPO company. CEOs and other key executives must become accustomed to engaging with activist shareholders, institutional investors and proxy advisory firms such as Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co. ("Glass Lewis"). Public company executives must be willing to continually adapt to changing shareholder concerns in a dynamic, quickly evolving landscape. A management team that is capable of interacting with investors on a proactive basis is also important. THE FOUNDER'S ROLE POST-IPO The founder's ongoing role at the public company is an important matter that should be resolved early on in the "going public" process. A founder's public company role can range from CEO to chairman to a member of the board. In some cases, the position may turn on the founder's background and experience. For example, a founder of a biotech company with a science background and minimal experience in finance may be less likely to serve as a CEO post-IPO, as compared to a CEO with an extensive finance background. Nevertheless, investors may feel comfortable with a founder- CEO that lacks public company experience if the founder structures a strong, experienced management team and board to support him or her. RECOMMENDATIONS As founders lead their companies toward a potential IPO, understanding and preparing for the cultural shift from a private to public company is key. Determining the founder's role in the post-IPO structure and finding and recruiting the right director slate and management team can be a lengthy, time-consuming and, with respect to giving up control, a difficult process. In the end, however, a robust independent board and "proven" management team will make the company attractive to investors and position the new public company for success.

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