Governance Best Practices

Maximise your IPO with good governance

You’ve no doubt seen the media interest in shared workspace ‘unicorn’ WeWork’s initial public offering (IPO). Unhappily for the company, much of the interest is negative, focusing on poor governance and a sky-high valuation seemingly at odds with its performance and prospects.

While WeWork has responded positively to this interest by acting quickly to allay concerns, the damage was done. Investors are looking at the prospectus, and the valuation has dropped alarmingly , from USD $ 47 billion to maybe as low as USD $15 billion.

What went wrong? And what can other businesses learn from it?

Modern Governance is critical

Good governance pre-IPO is the key to a successful public offering. Typically, a business will put its house in order when preparing for an IPO. This includes addressing key concerns such as:

– Accountability (clear delineation of responsibilities)

– Conflict avoidance (related-party transactions, board memberships)

– Diversity (expertise, industry, gender and race)

– Environmental, social and governance (ESG) criteria

– Independent leadership (voting rights, board composition)

Conflict avoidance is a particular concern and was a problem for WeWork. Several board members had interests in WeWork’s partners and suppliers, undermining their independence and raising concerns about the probity of various transactions.

These problems show that, as noted recently in Forbes, “What is not subject to conjecture is the message that governance matters … A critical aspect of that message is that conflicts matter; that there is a real sensitivity to suggestions of bias in the decision-making process.”

Good governance systems help companies to avoid such conflicts and can further ensure that the other concerns noted above are properly addressed and effectively managed, further enhancing an IPO.

We believe that Modern Governance is the best approach to this challenge. Modern Governance is built on the idea that deploying a single, unified technology platform will simplify and improve all aspects of governance.

Such a platform provides secure access to information, analytics, collaboration tools, voting, board papers and more. By ensuring board members have the data, visibility and security they need to discuss and decide strategic questions, it turns governance into a competitive advantage. In fact, companies with good governance outperform the S&P 500 index, according to the Diligent Institute.

What should boards do?

Critically, for companies preparing their IPO, governance gives insight into the many non-financial metrics that nonetheless have financial impacts. For example, multiclass stock structures can be a ‘red flag’ for investors, while poor diversity has clear implications for the bottom line. Companies with diverse boards perform better than those without, as shown, for example, in average one-year total shareholder return figures.

Leaders must think ahead and carefully position their company for its IPO. Best practices, especially around accounting and audit, are crucial. Boards must take a pro-active approach to governance and ensure the company meets standards for independence and diversity.

WeWork’s example is instructive. It’s to the company’s credit that, once investor concerns became clear, it took swift action to mitigate the problems at issue. Yet it was obvious that these actions were a response to outside pressure, not evidence of a strong internal culture.

Forbes again: “A good board doesn’t wait for this to happen. A good board makes changes and applies pressure to steer leaders, hold them accountable and make them better … The fact that this is the motivation the board required for change is unlikely to calm media, stakeholder and consumer fears”.

Money changes everything … or does it?

It could be suggested that WeWork’s real problem was its balance sheet, not its governance. Would the same concerns about its culture, board composition, voting rights and transactions have been raised?

A cynic might say ‘no’, but there are strong signs the market expects more from a business than a healthy balance sheet. After all, many companies are unprofitable before their IPO, as they are building their offer and might be focusing on growth, not profits.

New Street Research expects WeWork’s example “to positively impact other unicorns, possibly prompting founders to adopt a less centralized governance structure”. While it’s true that Renaissance Capital has noted, “People want to tolerate a lot of bad governance, they’re making money,” so it’s true that ESG plays a key role in making sure business operations are sustainable financially.

Which brings us back to modern governance, which makes compliance and best practice easier to implement. The best time to invest in such systems is long before your IPO; as a Stanford Graduate School of Business studies into pre-IPO companies reports, implementing good governance is incremental, with key decisions (such as the CEO, financial systems and auditing) taking place years in advance.

Good governance gives you confidence that your company is committed to becoming or becoming a good corporate citizen. This goes beyond profitability, and modern works that ignore this imperative so at their peril.

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