Private Companies and IPOs: Closing in on the Red Zone

by FEI Daily Staff

Board relationships and engagement can add significant value for a company, especially for major transitions or equity events.


The number one weakness in CEOs is failing to engage boards, reports 2013 Survey on CEO Performance Evaluations, a new survey by the Center for Leadership Development and Research at the Stanford Graduate School of Business, Stanford University’s Rock Center for Corporate Governance and the Miles Group.

Board relationships and engagement can add significant value for a company, especially for major transitions or equity events such as initial public offerings (IPOs). Key support from directors with hard-won wisdom can provide critical insights and negotiating savvy for CEOs and the management team.

In the case of an IPO, consider board composition for competitive advantage. Timely additions of board members who can assist with the unique challenges in this growth step can be done three-to-five years before the liquidity event.

In addition to building a board that has the financial expertise and can help meet U.S. Securities and Exchange Commission (SEC) requirements, there are several underlying issues for boards and how a CEO can leverage the expertise directors bring to the table, along with “take-aways.”

Constructive Challenge: Though privately held businesses are not bound by the same rules as public companies and are not required to have independent boards of directors it is a an important benchmark to follow, especially if going public. But what does a truly independent director mean? This is hotly debated.

Outside the typical advice of conflict of interest, it can be advantageous to have directors that make inquiries without conducting an inquisition. A key topic to probe is the candidate’s governance model.

Ask for examples of how the candidate has balanced a team aspect with standing up and saying “no” as necessary. Listen for ways that the candidate handles an emotionally loaded position.

For the CEO to fully leverage a sitting director’s expertise, there needs to be a comfortable back and forth — comfort on the part of both the director and the CEO. Asking the right question in the right way is an art, honed over time, which can help enhance decision-making in the boardroom.

Take-away: It is much harder to ask an intelligent question than to provide guidance.

Reflective Intelligence: This represents the lessons learned from “been there done that.” Negotiation with investment banking firms or other major players involved in an IPO — experts in negotiating board seats and other power positions — has specific power nuances. Finance people in particular seem to “loom large” during an IPO. Alongside this nuance the management team may be at a disadvantage due to the newness of the circumstances.

CEOs who have directors with IPO experience can lead conversations that create direction and intelligence for the company. Allow time on the agenda for this and as the CEO prepares “best-in-class” questions around this issue. If the board does not have this expertise, recruit a director who is ready with battle-won smarts that far outweigh what is often a decade of a one-year experience repeated nine times over.

Take-away: Many CEOs regret positions that were negotiated during the pre-IPO phase.

Culture: Ego-equilibrium is critical for a CEO to develop trust and deeper engagement with directors. Drivers for director selection can be outside of star names and Ivy League credentials. Large egos have a hidden cost and zero return.

Boardrooms need professionals who are curious and can lead productive, intensive debates. The ability to look beyond one's self and know the difference between self-regard and self-importance provides the openness for change and flexibly that translates into competitive advantage for the long-term. This is a brilliance that does not need to be showcased.

Take-away: Look for "on-the-ground" smarts built from experience over a staid, lettered approach.

Best-in-class boards have moved beyond a model with a great deal of attention on compliance or CEO monitoring into a clear focus on competitive advantage for the company. Today most valuable boards create a nucleus on how they provide an outside view, including: overcoming blind spots in strategy; raising awareness of external risks; connecting with governments, society and other stakeholders; giving credibility; and building trust.

Plan to have a majority of the board truly independent, take time to draw out their wisdom and watch for overstated egos when recruiting. This will help create effective board governance.

Tracy E. Houston, M.A. ([email protected]), is president of Board Resources Services, LLC. She specializes in board consulting and executive coaching with a heartfelt passion for rethinking performance, teams and the boardroom, as well creator of the Board Guru Governance eBook Series. Visit
This article first appeared in the July/August 2013 issue of Financial Executive magazine.