Survey of Governance Practices for IPO Companies

This post is based on a Davis Polk & Wardwell LLP client memorandum; the primary authors of the memorandum are Ning Chiu, William M. Kelly and Richard J. Sandler.

The U.S. IPO market, which has been in the doldrums since 2007, has recently been showing signs of life. We have recently completed several large transactions, and our pipeline of deals in process is more robust than at any time in recent memory. With more companies working on and considering IPOs, this is a good time to release our survey of corporate governance practices for IPO companies. Our survey focused on corporate governance at the time of IPO for the largest 50 U.S. company IPOs in 2007 and 2008. The results are presented separately excluding controlled companies in recognition of their different governance characteristics.

Corporate governance generally is of course in a state of unprecedented ferment, and larger companies in particular have over the past several years been steadily evolving their governance practices in response to pressures from shareholders and advisory groups. Our survey reveals, however, that this evolution has had only limited effect on companies at the IPO stage, and that IPO managements and sponsors generally seek to keep the center of gravity very much at the board rather than at the shareholder level. For instance:

  • only slightly more than half of board members were independent, a lower percentage than would be typical for later-stage companies
  • 64% of the companies had classified board structures
  • 88% of the companies had a plurality standard for director elections
  • while 20 companies had separate CEO and chairman positions, only four of them had an independent chairman
  • while only three companies had rights plans at the time of IPO, 86% authorized blank check preferred stock, 66% required supermajority votes for amending charters and bylaws and 68% prohibited shareholders from acting by written consent

Based on our experience there is no reason to think that as a general proposition these matters have any material impact on the success of the IPO or of the willingness of investors to participate. At the IPO stage, then, there continues to be considerable discretion in designing governance practices that best fit the company’s current situation.

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