In my last column (BusinessWeek.com, 1/28/08), the first of a series intended to demystify the initial public offering process, I offered an overview of what to expect. It's now time, my friends, for an explanation of what to do to get your house in order, meaning the steps you need to take to prepare. You'll need to nail down or fix your board structure, select and structure your committees, and reincorporate in Delaware (not required, but generally a good idea).
Let's get started.
Organize Your Board
As a public company, your board will be subject to scrutiny, so be sure your selections for board of directors members are solid. If in doubt about any of them, you may want to move some board members onto your advisory board, move some high-performing advisers onto your board of directors, or recruit some new board members.
Nasdaq and the NYSE require that the majority of the board be "independent." This means a majority of members may not be a family member of any key executives of the company, be an employee or officer of the company (for a minimum of three years), be involved in interlocking corporate compensation committees, affiliated with businesses that have material relationships exceeding a specified financial threshold, be employed by or have a relationship with the company's auditors, or have received compensation from the company in excess of $60,000 for Nasdaq and $100,000 for NYSE.
Create/Restructure Your Committees
You'll want to create three committees right away: audit, compensation, and nominating. The committee members come from your board of directors.
Before I outline each committee, know that all of them should adopt the following guidelines: create a charter stating its goals, responsibilities, and duties; set an annual meeting calendar plus a process for committee members to provide input on agenda items; deliver meeting materials at least three days in advance (five is preferred, but rarely happens); record meeting minutes and get them unanimously approved promptly following the meeting; have the committee chair brief the board of directors on key matters regularly, review the board annually (or whenever board member terms are up for vote), and make appropriate changes as needed.
The Audit Committee Warren Buffet says that the role of the audit committee is to "hold the auditor's feet to the fire." Yep. In addition, this committee is responsible for overseeing that quality accounting practices are followed, internal controls and independent objective auditors are used in order to deter fraud, and financial risks are anticipated and avoided. It also ensures that accurate financial information is distributed in a timely manner to the board of directors, shareholders, and public markets.
Audit committee members' specific duties are to appoint, compensate, and oversee outside auditors; resolve disagreements between management and outside auditors; establish procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing issues regardless of source of notification (whether via employees, shareholders, etc).
All members of the audit committee must be able to read financial statements, and at least one must have a sophisticated understanding of finance (for example, be employed in the past or present as an accounting or financial professional).
The Compensation Committee
This committee oversees the company's compensation strategies, plans, and programs. Salary, stock, and benefits are all subject to the scrutiny of the compensation committee. Performance is the key issue here—of the executive being compensated and the company. Competitive issues are addressed, too.
Typical duties include: establishing compensation policies and strategies and ensuring they are followed, establishing and assessing corporate and personal performance goals, and determining the amount and type of compensation for employees at different positions and directors. No special expertise is required to be on this committee, but creative thinking and patience are key as compensation can be complex and will significantly affect corporate performance.
The Nominating/Corporate Governance Committee
This committee evaluates and recommends new members to the board of directors. It will also select board members for the audit and compensation committees and determine the chairs and secretaries of each. Many companies expand the nominating committee to cover additional corporate governance issues.
The duties of this committee include: identifying, evaluating, and recommending candidates to serve on the company's board (regardless of the source of the recommendation—sometimes shareholders will recommend board members); overseeing board committee structure, composition, and operation; establishing policies and procedures to facilitate shareholder communications with the board; reviewing and assessing the performance of the board and its committees; overseeing director education; developing management succession plans; and developing and overseeing the company's corporate governance guidelines and possibly its code of ethics.
Reincorporate in Delaware
You don't have to do this, but I highly recommend it. More than 50% of all publicly traded companies in the U.S. and 60% of the Fortune 500 companies are incorporated in Delaware. Why? Easy. The state is known for widely followed corporate law interpreted by a highly respected court system, broad protection from liability for directors, all of which leads to a much larger pool of potential board candidates.
Talk to your attorney about this. The only issue will be if your company has a majority of its stockholders, sales, payroll, and property in a different state. This may prevent you from becoming a Delaware corporation.
In my next column, I'll address setting up stock plans for new employees, the road show, and more adventures in the IPO process.