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Preparing to go public • Determine key performance indicators to be used to communicate business performance to stakeholders that are in line with industry practices. • Design appropriate compensation programs that align and incentivize employee behavior and focus with the overall business strategy and key objectives. The company’s strategic plan should encompass both external and internal factors that span the entire organization. The plan establishes the framework for the annual budget, providing the topdown direction, financial targets and key assumptions. The annual budget should focus on key operational drivers of the business for both revenue and cost with key inputs from senior management. The budget process should be flexible and have a short cycle time to accommodate market-driven changes. Forecasting should be a periodic update to the budget (and strategic plan) that reflects changes and impacts actually being experienced in the marketplace. Although implementation of forecasting is generally the domain of the finance department, ownership of the process belongs with the recipients of the results, including operational management. The process should involve a focused, bottom-up process based on specific, measurable drivers and should closely involve operational managers. If the company does not have adequate sales forecasting, it may consider using key performance indicators, industry trends or other third-party data to benchmark target sales numbers. Similarly, external cost trends and industry averages can help quantify or even qualify expense forecasts. Creating standardized relationships between internal and external financial and operational sources can provide both insight and consistency in the forecasting process, and also identify a baseline to measure the company’s performance relative to the industry. At a minimum, forecasts should be updated semiannually, but more frequent updates are preferable. The actual results may prompt changes in strategies, priorities and resource allocation, with subsequent period forecasts reflecting the impacts of such changes. Ideally, the subsequent year’s budgeting process should be embedded in the forecasting process during the latter part of the current fiscal year. XBRL: During 2009, the SEC issued new rules and related guidance that requires public companies (both domestic and foreign private issuers) to provide their financial statements to the SEC in a separate exhibit to certain reports and registration statements in an interactive data format using Extensible Business Reporting Language (XBRL). The rules are designed to make it easier for analysts and investors to locate and compare data on financial and business performance in a standard format across all public companies. The XBRL rules also require public companies to post their XBRL filings on their corporate websites. With interactive data, all of the items in a financial statement are labeled with unique computer-readable “tags,” which make financial information more searchable on the Internet and readable by spreadsheet and other software. XBRL is not required for IPOs, but a company with an IPO that becomes effective will be required to comply with the XBRL rules commencing with periodic filings starting with its first Form 10-Q filed after the registration statement becomes effective. The rules should be consulted regarding when initial compliance with the rule commences, as this will be dependent on the timing of the IPO. Technology considerations: Information technology is a critical enabler for the company in creating value and achieving financial reporting and regulatory compliance. Companies that have not adequately invested in technology and tools for financial reporting and business operations may struggle with technology and system limitations in meeting the needs of a public company. This may require additional resources to ensure business processes are adapted to meeting IT system needs. In addition, the company may need to implement new technology and systems or customize existing systems and reports. The IT effort required for compliance with establishing, evaluating and obtaining an audit of ICFR should not be underestimated. Information technology plays a large role within the internal control structure and is an integral part of SOX compliance. A systems-embedded approach to the financial reporting process can include automated key controls to reduce the overall number of controls. IT strategy can be a key driver in accelerating the accounting close process through the reduction or consolidation of multiple general ledgers, charts of accounts and reporting systems. For systems that have disparate interfaces or lack realtime reporting capabilities, modifying the existing system’s capabilities or building the case for an enterprise resource planning system may be warranted. Greater use of IT systems can also enhance the budgeting and forecasting process and allow for the leveraging of information more effectively. Communication requirements to key stakeholders after the IPO about the performance of the company should be aligned with external reporting. Implementation of an integrated system providing both external and management reporting can provide timely, quality information. Summary: Becoming a public company often requires management to make numerous improvements to business processes and the underlying systems as they react to the demands of investors, government regulators and other stakeholders. Preparing for this change in status may require considerable time and effort. To achieve a more seamless transition, the company should consider taking steps to operate and report like a public company before the IPO becomes effective to ease the post-IPO transition. 2.3 Antitakeover defenses and other governance matters Cleary Gottlieb Steen & Hamilton LLP Before going public, the company will need to ensure that its governance structure meets SEC and stock exchange requirements. This is the ideal time for the company to consider organizational matters more generally, implement desired changes to the company’s jurisdiction of organization, subsidiary 24 NYSE IPO Guide
Preparing to go public framework and capital structure and put in place a strong board and governance structure, including antitakeover defenses, for a number of reasons: • Changes after the IPO will be very visible, likely requiring disclosure, governance document posting and potential filings. • Post-IPO changes may require stockholder approval, which may be difficult to obtain. • Some governance requirements, such as identifying independent directors, should be initiated early in the process, as they may take considerable time. It is important that the company work closely with the underwriters to develop a properly balanced board and governance structure, as certain elements may affect investor interest and, ultimately, pricing. The company should also anticipate the makeup of its stockholder base. What percentage of stockholders are likely to be institutional investors compared to retail investors? Are there likely to be any hedge funds or stockholder activists? Going forward, these characteristics of the stockholder base will be an important element of investor relations. Governance matters have become a central focus of activist stockholders, as well as investment advisory firms such as ISS and Glass Lewis, which evaluate a company’s governance structure in making stockholder voting recommendations. This chapter describes the governance structure for a U.S. domestic company and, in particular, a Delaware corporation. For a discussion of governance issues relevant to foreign private issuers, see Section 9.7. Board of directors and board committees: A public company’s board composition and structure are often very different from those of a private company. A U.S. public company must comply with governance requirements imposed by stock exchange listing requirements and SEC rules, as well as related disclosure requirements. For more information about these stock exchange listing requirements, see Section 6.2. In particular, the stock exchanges, including the NYSE, require that the board of directors have a majority of independent directors within one year of listing. In addition, post-IPO, the company must have an audit committee meeting SEC and stock exchange rules on composition, independence and financial expertise and under stock exchange rules must also have compensation and nominating committees made up of independent directors. As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd- Frank Act), the stock exchange rules now also contain additional independence requirements for compensation committee members. Some of these governance requirements can be phased in following the IPO, but the company generally must be fully compliant within one year. “Controlled companies,” or companies with a majority stockholder, are exempt from most of these requirements except the audit committee rules. Other SEC and U.S. tax rules also typically influence the composition of the compensation committee, as discussed in Section 2.4, as well as “interlocking” relationships with other companies. Beyond the required structures, the company should carefully consider the right mix of board member qualifications; and a larger board, with more than seven or eight members, might warrant the formation of other standing committees, such as a finance committee or a risk committee. Antitakeover defenses: Antitakeover defenses are a key element of pre-IPO governance planning. Achieving the right balance is important, as too strong a defense profile may be disfavored by investors, which often benefit from stock price premiums in a takeover context; many of these protections may attract negative stockholder attention and proposals for change down the road. The defenses an IPO company may consider include the following: • Poison pill (or “rights plan”)— Increasingly a focus of pressure from activist stockholders, the poison pill remains the most potent structural takeover defense. Under a typical poison pill or rights plan, the company issues rights to the existing stockholders. These rights allow holders (other than a bidder) to purchase stock in the target or in the acquiring company at a steep discount (usually half price) if a hostile bidder acquires a certain percentage (usually 15% or 20%) of the outstanding shares. This dilutes the voting power of the bidder and makes it more expensive to acquire control of the target. Although their terms and conditions vary considerably, the purpose of a poison pill is to force potential bidders to negotiate with the target’s board of directors. The rights usually have redemption provisions that permit the company to redeem the rights at a nominal price. If the acquisition is friendly and the board approves the deal, it may use this feature to redeem the pill or otherwise exempt the transaction. • Controlling changes to the board of directors—Various charter or bylaw provisions related to changes in directors can make it more difficult for hostile bidders or dissidents to influence and control a board of directors, although these are also under pressure from activist stockholders. For example, with a typical classified or staggered board having three classes of directors, each elected for a three-year term, only one-third of the directors are up for renewal at each annual meeting. The company may wish to avoid other provisions that make it easier for an insurgent group to force changes in directors and thus gain control, such as cumulative voting, which can result in the election of a director with the support of only a small percentage of stockholders, and provisions allowing stockholders to remove directors without cause, increase the number of directors without limit and fill board vacancies. The company should also consider whether to adopt a plurality or majority voting standard for director elections. While plurality voting generally increases the likelihood that management’s director nominees will be elected, majority voting provides for a more democratic process and has gained in popularity over the past several years, with a strong focus by activist stockholders and investment advisory firms. NYSE IPO Guide 25
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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