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Transitioning Your Board of Directors From Private to Public
CFO Perspectives on How Private Company Boards Should Evolve Ahead of an IPO
Taking your company public will profoundly impact the composition, role and requirements of your board of directors (BOD). Public companies have a unique set of requirements for how their BOD must operate, and it is a unique transition that private company leaders may feel underprepared for leading up to an IPO. That’s why we convened The CFO|Circle Community to host an in-depth discussion on the topic. With insights from George Anderson of Spencer Stuart and four CFOs with first-hand experience transitioning from private to public boards — Anan Kashap @ Poshmark, Hanno Damm @ Trustpilot, Rob Krolik @ Burst (formerly Yelp), and Yvonne Hao @ Cove Hill Partners (formerly PillPack) — the conversation dove into some of the key challenges and considerations of assembling an IPO-ready BOD.
The general consensus of the conversation: transitioning to a public company board is a unique opportunity to onboard the guidance and diverse experience you need to take your company to the next level.
The CFO’s Unique Role in Board Transition
Board member search and selection can be rigorous, and the CFO can add unique value to the process. As #2 in the boardroom alongside the CEO, the CFO will be working closely with all members of the board and building their own direct relationships over time. For this reason, our experts unanimously agreed that CFO’s should be intimately involved in the candidate screening process, both in conducting interviews and checking references. CFO’s have also often worked with many board members over their careers which leads to good pattern recognition.
The most important role of the CFO in board composition is identifying strong candidates for the Audit and Finance Committees, which ensure the company stays compliant with public listing and regulatory standards (more on that below). Our experts pointed out that finding committee members with prior public company CFO or board experience can be greatly beneficial in guiding CFO’s through the transition to the public markets.
Starting the Process Early
Our conversation began with a clear call-to-action for private company CFO’s: don’t wait to start evolving your board for the rigor of public life. Begin the process as early as 12 months out (and definitely no less than 6), starting with the sections of your board that need immediate attention (more on that later). Keep in mind the search process for board members alone can take up to three months, which is why starting as early as possible gives you more time to think through your ideal list of candidates.
Right-Sizing Your Board
While there’s no hard-set number of board seats a public company should have (the S&P 500 average in 2020 was 10.7, according to Spencer Stuart), our experts agreed that it’s best to keep your board as small and focused as possible. Between 7-9 board members is ideal, and a general rule of thumb is to keep the number odd in case of a dead-locked board vote (though these are increasingly rare).
Most importantly, think about how to construct a board that feels collaborative.
“Board chemistry and alchemy is important. It gets harder to maintain that collaborative environment when you start going up to 13 or 15 board members.” – Yvonne Hao, Cove Hill Partners – experienced board member and former CFO of PillPack, acq. AMZN
Replacing Existing Board Members
Private companies should also be prepared to replace a few existing board members as part of going public. VC investors may decide to depart after selling their equity post-IPO or the 90-day lock-up period; you don’t want to be left scrambling to fill your board seats in this situation.
Start having conversations about these future transitions with your investors now, one CFO advocated. It’s important to get a sense of which VCs (if any) plan to depart and how much time you’ll need to replace that individual.
Perhaps the most drastic post-IPO change happens within the composition of your board, driven by SEC and public exchange listing standards and requirements for public companies. For instance, the majority of your board must remain independent (i.e., no prior relationship or affiliation with the company). Your board must also have three core committees: Audit, Compensation and Corporate Governance. Within the Audit Committee, you’ll need to have at least one independent board member before going public (within one year, the entire Committee should be independent). Regulators also have enhanced standards for who can join the Audit and Finance Committees, which is critical to keep in mind as you assemble your board.
Who and What to Look For
Not surprisingly, a lot of our conversation focused around best practices for identifying and selecting new board members. While we likely could have spent hours breaking down the matrix of skills, attributes, and expertise of an effective board member, our experts reminded us that every company is different. Therefore, every board should be unique.
Overall, it’s important to look for individuals that are going to add real value and supplement the expertise of your team. “Operator” board members that have direct experience within your industry or with your target customer base can be particularly helpful. Still, you also need individuals that are willing to be actively involved at every meeting, providing the kind of strategic guidance your company needs.
Diversity should also be a central part of assembling your board. A homogenous board of directors is neither effective nor healthy for a company. It’s no surprise that female representation on boards has traditionally been lacking across every industry, but that is starting to change. According to Spencer Stuart, roughly 47% of new independent board members added to S&P 500 companies in 2020 were women, and 62% of Spencer Stuart’s board member placements have been women and people of color. It was encouraging to see our audience soundly agreed that a more inclusive board was core to their selection process, but demand for these board members still far outweighs supply. Several of our participants shared organizations (linked at the bottom of this article) that specialize in matching companies with more diverse board candidates, including many of the experienced female CFO’s in our Circle community.
As we wrapped up the conversation, our CFO’s agreed that board transition is an evolutionary process. While it’s important to quickly fill the roles needed to manage the transition to a public company, leaders should constantly prioritize taking the time to identify gaps and define who would add value to their board at every stage of growth.
At Founders Circle Capital, we always advocate that it’s never smart to go it alone. Which is why we’ll continue to facilitate content and conversations like this one within our community and give growth stage leaders the guidance they need to make these types of big decisions. If that’s something that appeals to you, apply to join The Circle.
Resources for Sourcing Diverse Board Candidates: