Report: Corporate governance and disclosure trends among venture-backed IPOs

Companies considering an initial public offering (IPO) say that improved corporate governance practices remain a top challenge in preparing for an IPO.

A report released this week by Wilson Sonsini Goodrich & Rosati (WSGR), an international law firm, examines the patterns involved in the corporate governance and disclosure practices of venture-backed companies incorporated in the US.

The Palo Alto-based firm analyzed 50 companies involved in the largest IPOs, quantified by deal size, between January 2010 and June 2011.  Firms involved in the study included Evestnet, Financial Engines, AVEO Pharmaceuticals, LinkedIn and Zipcar.

The following were the key findings:

Directors and independence:  Board size ranged from five to 10 directors. Despite having ‘phase-in’ periods to comply with stock exchange requirements regarding majority board independence, each company involved in the study had a majority of independent directors on its board, and most were substantially independent, at the time of the IPO.

Also, slightly more companies dropped the axe between the chairman and CEO roles instead of combining them, the report states.

Board committees:  All the companies surveyed had board members who were venture capitalists affiliated with venture funds that had previously invested in the companies. In many cases the venture capitalists were determined to become independent directors, notwithstanding their share ownership.

Board policies: Another trend emerging from this study was that the companies had adopted, or planned to adopt, key corporate governance board policies in connection with the IPO, such as rigid corporate governance guidelines, codes of business conduct, and related party transactions or procedures.

Stock plans: Fewer than half of the companies surveyed implemented an employee stock purchase plan in connection with the IPO but those that did frequently included an ‘evergreen’ provision, allowing shares to be automatically added to the available pool annually.

Key metrics and non-GAAP financial measures:  Almost half of the companies disclosed non-GAAP financial practices, while a significant minority disclosed non-financial key metrics (subscribers or registered members for internet companies) in addition to financial metrics.

Defensive measures: None of the companies had a poison pill in place at the time of their IPO, but other defensive measures were adopted.

Making the jump from private to public while satisfying the requirements of SEC regulations and meeting public expectations can be daunting.

In June, a KPMG report revealed that for senior executives of companies preparing for an IPO, these were the top three challenges: improving corporate governance (64 percent); preparation of a robust business plan (40 percent); and preparation of financial track record (36 percent).

A copy of the WSGR report can be downloaded here.