Page 55 - Initial Public Offering - An Introduction to IPO on Wall Street

Once a corporation becomes public its management can attract attention. Shareholders will
determine the makeup of the board and, after going public, will get a vote on elected directors
beginning with the first annual shareholders meeting.

For new businesses, some large institutional investors have been more outspoken about board
composition. They raise concerns about any managers they think are "excessively-boarded,"
that is, sitting on several boards, and if a board does not seem to be adequately diverse.

Another important step in meeting the governance requirements is setting up an audit
committee.
In maintaining the quality and accountability of organizational reporting, audit committees play
an important role. Investors already expect data that has been released to be subject to an
independent, board-level analysis. The function and makeup of public company audit
committees are clearly specified by Sarbanes-Oxley. For audit committees, some of the critical
requirements are that they:

 Are comprised completely of board members. To be deemed autonomous, the entity may
not undertake any consultancy, advisory or other payment fees from the organization or
any of its affiliates, other than in his or her role as a member of the audit committee, the
board members or any other management board. Companies must check with their
securities lawyers to verify before going public, as the NASDAQ and the NYSE have
distinct independence laws.
 Appoint at least one person to act as a financial professional defined as: (1) having
experience as a chief accounting or financial officer, director, auditor or accountant; or (2)
having experience in supervising or evaluating the performance of organizations in
reviewing financial reports; or (3) having other related experience ( e.g., as a hedge fund
manager, financial analyst, etc.);
 They are explicitly accountable for the selection, benefits, and supervision of independent
auditors at the firm.
 Have the power to retain independent commission and consultants when deemed
appropriate to perform their duties and to develop protocols for engaging with employee
and other issues in matters of auditing, internal control, or accounting.

In addition to the above, it is important to understand the potential shareholder mix.
There is a comprehensible propensity to concentrate on the first selling of shares to the public
when an organization decides to go public, including the way the underwriter would market
the bid, the amount of shares to sell, and the pricing of the shares.

As a consequence, firms commit a great deal of energy to securing initial investors. Often,
however, investors buying at the IPO don't hold the shares for the longer run. Therefore, after
initial IPO shareholders have discarded of their shares, businesses will find that they have a
large variety of investors and face difficulties in understanding what these investors want from
the standpoint of governance.

The shareholder base is not going to be uniform. Shareholders have various investment
viewpoints and priorities, and may have different assumptions about the success of a business,
as well as contrasting views about how to organize the board and what governance practices to
follow. It can be a struggle to meet shareholders' conflicting needs.

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