Introduction

Today's entrepreneurs are admired for their ingenuity and extraordinary work ethic as they bring ideas to life through distinct corporate ventures. The initial corporate formations may start out as private companies where founders are consumed with day-to-day activities as they work to raise capital. The decision to establish a company can be challenging, with one of the key initial steps—in additional to fundraising—being to attract and retain talent. No one else will have as much skin in the game as the entrepreneur until major investors enter the picture.

While the concept of corporate governance is not new, formal, good governance is relatively new in the context of history. Outside the United States, three governance models are typically used—German, Nordic, and Japanese.¹ In the United States, we employ a fourth model—Anglo-American—with a one-tiered board of directors.

The first companies formed were those providing goods and services such as banking and textiles, as America prospered. In fact, it is believed that the concept of incorporating accelerated in the United States because those entities were relatively easy to create. Most states initially allowed free incorporation and required only a simple registration. Each state developed its own set of corporation laws as more sophisticated corporate entities were needed. Over the decades, the U.S. Congress passed major pieces of legislation to address securities regulation, capital formation, and the necessary regulatory frameworks.²

This chapter is not meant to be a treatise on private or public corporate law. Rather, we explore the differences and similarities between private and public companies, governance models, the opportunities each offers, and the challenges they face. We address good governance practices that are important for a board of directors, as well as the C-suite, if they decide:

• To keep the company private,
• To position it to become a public company, or
• To be prepared for it to merge or be acquired by another company.

We also examine the distinct roles of the private and public company boards of directors and CEOs, as well as the consideration given to taking a company public versus growing it privately.

Finally, we discuss emerging governance trends that are relevant for both private and public companies.

During the summer and early fall of 2018,³ we interviewed a number of founders, CEOs, venture capitalists, as well as private and public company board members. The viewpoints of the interviewees are important because they reinforce what we have experienced ourselves. They discussed the serious time commitment necessary to keep private companies afloat and financially on track, and they, too, worry about reputational risk, competition, relationships with investors, attracting capital, and shaky public markets.

This is very similar to the challenges faced by public company CEOs and boards. And, if anyone thought that board or CEO service is easy, please read this chapter. Our interviewees were clear: It's very hard work.

At some point, a private company may become public. The scrutiny from regulators, governance responsibilities, and oversight from the board of directors will bear on any founder. Enter shareholders, who offer opinions on the company's short- and long-term direction and where reputational risk is enhanced. Welcome also to the new world of engagement on executive compensation, diversity, environmental, social, and governance issues (ESG), shareholder proposals, proxy statements, and voting.

As founders of our own companies, we recognize the intersection between private and public companies, boardroom dynamics, and inherent tensions that exist between capital-raising and entrepreneurial vision. Sadly, we've seen firsthand what happens when principles are overlooked and oversight is lacking, leading companies and investors to suffer. We hope that this chapter provides insight into governance best practices and will be a guide should a private company desire to merge with or transform into a public company.

There are thousands of private and public companies in the United States, and while the legal constructs might be different, many similarities exist:

• Corporate governance principles that define the roles and responsibilities of a board of directors and senior management
• Investors and a need for capital through structured loans, lending arrangements, the sale of shares, or investments by investors seeking equity in the company
• A CEO who is responsible for day-to-day operations and implementation of strategy
• Defined, formalized roles for standing board committees, and creation of ad hoc committees
• Policies on risk assessment, disclosure, compliance, and controls as well as systematic review of those policies and procedures
• Adoption of long-term strategies, including a private company's decision to remain private or go public, as well as a public company's plan for long-term growth and creation of shareholder value

Question 1: How do you define good corporate governance principles and best practices?

We asked interviewees for their definition of good governance and whether there is a difference between private versus public companies: “There shouldn't be [a difference] but most people think there is,” said John Butler, CEO, Akebia Therapeutics Inc. “As a broader term, it encompasses all processes and mechanisms in which you control and direct a company.”

Caroline Loewy, board member and former public and private company CFO, believes that good governance practices can help by “balancing the diverging interests of the board, employees, and others, especially when there is a different tenure or profile for the different investors. For example, a venture capitalist may have been involved with the company for years and may be reaching the end of its fund life with no dry powder compared to a new venture capital investor. Governance helps to manage the self-interest that people feel and encourages them to act as a fiduciary.”

Board member Christi van Heek agreed. “Governance is a responsibility of overseeing controls, compliance, leadership, audit, and compensation, to name a few. It includes all the activities of a company and overseeing that management is in control, including transparency. It includes providing advice, asking questions, looking into details, and, in general, mitigating risk.”

Board member, former venture capitalist, and current public company CEO Michael Raab said,

Good governance at the board level is first and foremost about keeping fiduciary duties in mind, and all that means. With directors, you have two buckets of phenotypes. One tends to be analytical and boils the decision-making process down to a number to drive thinking and decision-making. Another group has a more wholistic view. The analytical types tend to look at the building of shareholder value in a relatively short timeframe. The wholistic types are more comfortable with risk, allowing a company to be built beyond the near term. It's good to have both, along with gender distribution on a board. I also like having boards where people have a range of board experience. We all get a little long in the tooth, so bringing new blood onto the board whether experienced or not tends to rejuvenate thinking.

Patricia Morrison, a public healthcare company board member, raised the issue of accountability and reputational risk.

Good governance is where your accountability is. It's very easy sometimes for boards of trustees to be behind an individual—the CEO, and so on. Bad governance is when you start to let one person make decisions without the collective knowledge of shareholders or donors and what they want. Bad governance is approving deals or contracts that are bad for business, bad for return on investment. There are a lot of things that go along with good governance, such as being responsible for the reputation of a company, which can affect return on investment and risk. Is the company following accepted practices? Does it have the potential for a scandal? That's why good governance now includes culture and individual reputations.

The interviews established that there are variations of governance structures between small and large companies, regardless of public or private, because the audiences are different. For smaller companies, the policies, as well as checks and balance systems, are more closely aligned to the board members and management. They have to individually navigate those areas. In larger companies, board members and senior management may be more insulated from the application of the policies and strategy direction set by individual leaders. MOBILion Systems Inc. Chief Executive Officer Melissa Sherman, PhD, said, “[Y]ou are alone in some ways, yet you are part of a board.”

Another challenge lies in balancing the interests among investors, from traditional shareholders to venture capitalists, with the strategic direction of the board. This is where strong corporate governance principles help lead the way. Dr. Sherman noted, “If you have stakeholders with very different interests, how do you satisfy the interests of all and arrive at the right decision for the company? VCs [venture capitalists] at different funds at different lifecycles are fighting for their position for their business, so how do you bridge that gap? Whereas with a public company, there is a broader distribution so those gaps in individual interests aren't as wide—the investor base is more uniform. In a private company where there is a dysfunctional board, you can be alone because you are trying to navigate issues independently.”

Scott Braunstein, MD, is a private and public company board member, owns a healthcare consulting firm, and is an operating partner at Aisling Capital. He emphasized the challenge of financing.

Financing is always the hurdle, without question. Generally, there can be limited knowledge on the valuation side of the equation. As a public investor sitting on a private board, I have noticed the disconnect that can exist; not all board members fully understand. There is a general disconnect that when a private board is looking for a new member, the board often overlooks expertise in the public markets. It is an important piece of the equation that boards often rely on their investment banking colleagues to provide, rather than adding board members with this specific insight and expertise.

Strategy and risk-taking were challenges raised by several private and public company board members, particularly as the need to balance stakeholders with diverse return-on-investment time frames came into play. The challenges ranged from smaller differences of opinion to larger issues of strategy, financing, and board control.

Ms. van Heek said, “Bad governance includes a lack of controls that elevates a company's risk. It can occur in both public and private organizations. It may be a lack of transparency with the board, the management, and, if applicable, the public. It may comprise poor compensation policies. This is why separate board committees are so important. For a board to review everything in a board meeting is virtually impossible—that's where it's necessary to review the business and the strategic goals. The committees are important to dive into more depth.”

How do you know when bad governance has begun to destabilize the board? If there are “more operators than strategists, but also when there isn't a balance of influence among the various board members. From board member to board member, if there is some faction that has undue influence on decisions, that's not good governance. This could occur in a private setting, where someone has status as an investor. “Or, in some cases, it's tenure or personality, things that are less objective,” said Ms. Loewy.

While each interviewee had their own interpretation of governance, there was one thread that rang clear: Bad governance can jeopardize the company's sustainability and affect investment returns and employee well-being and create reputational risk.

Question 2: What is the biggest challenge of the board of a private company?

All interviewees agreed that the board plays the biggest role in the adoption of and adherence to best practices for good corporate governance. Board members must “walk the walk” and set the example for senior management, company associates, and other stakeholders.

If financing is a challenge, then a board must spend considerable time identifying options while balancing short-term versus long-term strategies. Financing issues can complicate the delicate relationships between board members. Adopting and sticking to governance principles is a good start. However, good governance is a living, breathing entity; it exists in every board transaction, every business initiative. As our interviewees highlighted, a perfectly run board meeting should not be at the expense of constructive dialogue and differing opinions. An honest exchange of ideas and strategies is critical to the long-term success of an organization.

Realistic time commitments of board members and current board skillsets are keys to success, such that periodic board refreshment may be necessary. Mr. Raab noted that it can be “tough as a new investor coming into a private company—seeing the dynamics among board members and knowing that the right thing to do is to completely recapitalize the company and start anew. Some of those people around the table will have money to participate again, but there are others who won't, and you will alienate them. Redoing the board is a tough, vexing governance issue. In a private company world, you have to consider whether it's worth going through it. If you do it well, you give the company additional life, but it requires intestinal fortitude.”

Another challenge in private company board governance is that of “power imbalance.” Raising capital may primarily fall to an individual, as in the case of founder Michael Dell taking his company private. Ms. Loewy observed, “In a private company, there is less of a sense of the overall fiduciary responsibility—from top to bottom of the capital structure. There is more focus on an exit strategy, liquidity, and seeking future funding. With a private company, you don't have ready access to capital and a daily mark-to-market with a stock price.”

Dr. Braunstein added, “The goal is a create a highly functioning board that can address these challenges and align the varying motivations. You try to do what's best for stakeholders but if they are much fewer in number, then the potential gap between each of their individual interests can be wider. Whereas with a public company, there is a broader distribution, so those gaps in individual interests aren't as wide.”

Question 3: Describe the toughest governance challenge you've encountered while at a private company. What would you change/what could have changed to make this easier?

Mr. Butler said that sometimes the most drastic decisions are ultimately the best decisions. “The [wrong] mix of board members can get in the way of product development, growth, and financial performance unless good governance is in place. It takes hard work getting through issues. The business plan and responsibility to investors should be top of mind for everyone and it can take longer to get the outcome you need without strong governance in place.”

Turnaround situations can be another challenge. Ms. Loewy mentioned that the mix of VC investors can become a big divergence. She said, “The need to raise capital will cause the company to seek new money. Some investors will be looking for an exit strategy and that will lead to newer investors and potentially a new management team. Conflicts can arise as the goals and perspectives of the various parties change. Decisions whether to move to an IPO or remain private can make some investors feel squeezed. Their investment could potentially be diluted with a newer valuation.”

Dr. Sherman and Ms. Morrison cited challenges arising from the overarching influence of one board member. How much control should one main investor have as a board member? The line must be clear to avoid overreaching so the board can meet its full fiduciary responsibility.

Dr. Braunstein mentioned that some of the biggest challenges revolve around disclosure. He said, “Circumstances can arise where there is less than adequate disclosure made by private companies to investors. It comes down to the integrity of the management team.”

Others noted that large private investors will often hold board positions with access to data rooms, whereas smaller private investors do not. They have the greater risk.

In summary, the biggest board challenges—conflicts and undue influence—may be eased with adequate disclosure and governance controls in place.

Question 4: To whom is a private company board beholden, the venture capital or private equity firm, or the company's employees?

The question of loyalty is essential to answer early in a private company's creation. On the one hand, one is recruited to serve on a private company board typically because of unique skillset, equity position, and/or ability to raise capital. On the other hand, a board member is expected to act independently and consider decisions through the lens of what is—first and foremost—best for the company, its shareholders, and employees.

Sometimes, diverging interests among board members become apparent. Balancing these disparate interests can take considerable time and effort. Early adoption of governance best practices can help board members find that right balance and make decisions that are in the best interests of the company.

As Ms. van Heek stated, “Employees must be treated well, but shareholders must also be treated well, otherwise the next round of financing may not be successful. Both are valuable resources and it can't be done without either of them.”

“In a private company situation, you're not required to have an independent board, and you have your main investors as part of that board,” said Alison Lawton, CEO and president of Kaleido Biosciences. “And sometimes the goals and the time horizons of those private investors may be different than those of the company and the management team. On a public board, you're looking to how you build, grow, and add value to the company for the long-term, whereas on a private board, there may be a much shorter-term perspective of some of the key investors. That's where I see the big difference, and so some of the decisions on strategy may be impacted by these perspectives.”

Ms. Morrison was clear: “From a governance standpoint, it starts with investors. You have to care about employees, sustainability, and other issues because they are reputational. The investors have to care about the long-term health of this company. If it's good for employees, then it's good for investors.”

Dr. Braunstein emphasized, “Any company should have standards of ethics and a good culture while they are achieving their goals. As a private company, you likely have a series of shareholders, and all employees are to do their jobs to the best of their abilities and to serve the company's greater good. It shouldn't matter if it's a small group of investors in a private company or in a larger public company.”

Question 5: How do company cultures differ in private versus public companies?

“Culture eats strategy for breakfast,” is a quote that is attributable to the late Peter Drucker.⁴ We were curious about culture and whether our interviewees have noticed differences between private and public companies.

Because our interviewees have experience in both types of companies, we asked if there were any differences in cultural norms. Ms. van Heek felt that “private cultures are very different and very individualistic. The culture might be more relaxed in a private company than in a public atmosphere, although that's variable, too.” Ms. Loewy agreed and pointed out that with company culture, at least at the management level, “there is more of an urgency with public companies because timelines are out there in the light of day. In private companies, you can be a little less concerned with timing. Management teams often don't feel that pressure to make it happen on time and on budget, which they have more often in public companies.”

The interviewees were able to discern several cultural differences between private and public companies, including:

• Personnel. In a smaller private company, there can be a limited number of employees, so everyone needs to have a more wholistic background and play a variety of roles.
• Financial experts. Full-time financial experts are more frequently employed in a public company. In a private company, without the need to publicly report quarterly, comprehensive milestones can be more strategic and visionary.
• Public markets. Public companies tend to review information through the lens of how the stock market will react. Employees tend to focus on stock prices on a daily basis.
• Problem-solving. Private companies may evaluate how to solve a problem quickly, or rapidly expand on an idea if it's a good one. With a public company, more risk aversion is naturally built into the culture. This means that public companies often take longer to carefully weigh investor reactions, thus taking focus away from daily operations.

In the report, “Board Leadership in Corporate Culture,” a survey was conducted among chief executives, chief finance officers, chairpersons, directors, corporate secretaries, risk officers, and investment managers. The study found:⁵

Despite culture being in the top three priorities for company boards, only 20% of 450 London-based directors and board members reported spending the time required to manage and improve it. Some 62% of survey respondents felt that they were primarily responsible for setting culture from the top of an organization. However, a similar proportion (63%) either did not consider culture as part of the formal risk assessment or failed to routinely consider the risk associated with their corporate culture.⁶

In summary, while there are differences in culture, the tone at the top—and regular review of culture—are essential for both.

Question 6: Is the role of the board different for a public company compared to a private company?

“The rules are different [for public vs. private companies],” said Ms. van Heek. “For example, there is no Sarbanes-Oxley (SOX) oversight in a private company. I still think that the role of a board member is oversight. The rules and stringency are different, but oversight remains. In all circumstances there is a fiduciary responsibility to shareholders. And if you are an independent board member, then it's very important to keep raising the flag of independence and fiduciary responsibility to all shareholders.”

Mr. Butler concurred, believing that

the roles are not fundamentally different. The fiduciary obligation persists, even in a private company setting with family members at the helm of the board. The role of the board is not to become too operationally focused, even with a founder as the chair or an investor with significant ownership who is a board member. I've heard it described that a public company board has two choices—support management or change management. In supporting management, that doesn't mean the board is a rubberstamp, but ultimately is there to help management appropriately accomplish the organization's goals. If they can't do that, then it's the board's job to change management. It's that nexus when a board starts operating the business that becomes a challenge. A lot of people will define private boards in a much broader sense—they are closer to the operation of the company. I don't fundamentally think that should be the case—you are there as a board member to look out for the interests of all stakeholders.

Dr. Sherman noted that the boards' drive for end goals are different. “The end goal for a public company board revolves around quarterly results and the public markets. For private company boards, the end goal is building long-term strategy.”

“At its core, in a private or nonprofit company, you might have one owner. But you are still accountable to that owner's investment,” outlined Ms. Morrison. “So, if there is a private equity firm as the majority owner, then what is the goal of the private equity company? Some of them are long-term holders, there to turn the company around; some are there to take costs out and exit quickly. Everybody picks a board that represents the owners.”

In summary, while public and private company boards are different, the need to balance the interests of investors and shareholders is essential.

Question 7: Should a founder serve as CEO and chairman and, if so, is a lead director important when the founder is the CEO and chair?

There's a lot to unpack with these questions. An easy answer is “Yes.” Let's start with the role of the board, especially when the founder serves as the CEO and chair. We asked interviewees how a founder and board interact on key strategies, transparency, and ethics. While we were encouraged, we also learned there can be a “perverse misalignment of interests with people who don't have good experience around that board table.”

Mr. Raab explained why founders want to serve as board chairs.

Founders have an incredible desire and drive to make something happen that is phenomenal. They are more often common shareholders, not preferred, however, because they don't have the cash early on to be on the preferred side. They easily get diluted in subsequent financings. It's pretty frequent that the founder is not ultimately the long-term CEO. And when that moment happens, it's extraordinarily painful for the CEO/founder, employees, and board. What I've seen happen too frequently is that short-term pain for investors, particularly VCs, is considered more important than just giving a little more money to that founder to make his or her exit more graceful and palatable. It becomes a battle, which is too bad because in the long story of the company, those 1 to 2 percent of shares would be irrelevant, but you usually spend more emotional and intellectual energy than is necessary.

Ms. van Heek, said, “Maybe the founder can be a CEO or chairperson. But you do need a lead independent director if that founder isn't capable of running the board. So, it depends on who the founder is and his or her skills as to whether they can lead the company. If not, maybe the founder is not in the right position. The problem is that it can become endemic that the founder becomes CEO and/or chair of the company and it may be difficult to change without angst, if necessary.”

“This is one of those things where it depends on the people involved,” added Mr. Butler. “When I became Akebia's CEO, the person who was the CEO before was the founder. The company split into two companies and the founder became the CEO of the other company. I'm sure that there are founders who can be very productive and understand what they are good at, and what they are not, and leave professional management to professional managers.”

“For some period of time—especially the early stage—a founder should be on the board depending on his or her skills,” highlighted Dr. Sherman. “The founder might not become the CEO, but for some point in time he or she should be on the board. That service should not be in perpetuity. It's usually better that the founder not serve as CEO or chair. The chair can be the buffer or liaison between the CEO and the founder, as well as other board members in times of tension.”

Ms. Morrison agreed.

This is all very situational. For example, a founder can be incredibly powerful. He or she also may be all about the product versus the mechanisms of being a private or a public CEO. When an ego is involved, at some point the board has to say that an individual is just that—an individual. If a founder created a product, is his or her brain required to keep that product going? Sometimes what's best for the company is for the founder to step down. I personally don't believe that any former CEOs or founders should be on a board for very long after stepping down from the CEO/founder position.

Our interviewees were quick to point out that having strong governance practices will help any board deal with the variety of interests represented around the table. They also underscored that the board should consist of subject matter experts related to the company's sector or industry, business experts to balance out special interests, a dose of independence, and the need for diversity. Potential board members are generally asked for previous board experience to be documented. This question leads us to ask, “How does one find their first board seat?” The answer is individualistic and situational, but clearly nonprofit experience, operational corporate experience, and financial experience should count.

Question 8: What role should the Securities and Exchange Commission (SEC) play in oversight of private companies?

We asked interviewees whether oversight of private companies should be expanded by the SEC. Recall that the SEC was created primarily to protect investors in the capital markets. The SEC states: “Congress—during the peak year of the Depression—passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the SEC, was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing.”⁷ Interviewees believed that regulations to provide additional transparency, particularly as private companies enter the public markets, may be acceptable as long as they do not have a chilling effect or overburden companies.

Ms. van Heek said,

If private company board members haven't been public company members, then it can make a difference. The public company board members tend to look at issues differently and sometimes with more scrutiny. However, how can we overburden young public companies and make it more difficult for them? Some of the earlier regulations were challenging, such as SOX (the Sarbanes-Oxley Act). If you required all these regulatory measures at the beginning of a start-up, then young companies may fail because they don't have the resources. There has to be some carefully thought out balance between regulation and the amount of oversight.

“So, from a governance perspective, it would be important for private investors to have the backing and support of the SEC,” highlighted Mr. Raab. “My fear is that if the SEC would regulate this area, it may not be productive for a small company. It would be a disincentive to start a company.”

Mr. Butler added, “When you think about a Theranos-type situation—you had a lot of investors who weren't sophisticated med-tech investors, and they were investing a lot of money. If someone is raising $1 billion, it does feel like there should be more oversight of what a company is saying. I am not sure whether a ‘money’ or ‘number-of-investors’ threshold should be considered. But the way that Theranos was structured with its complex voting structure—that should have been a red flag. It does feel like there is a position for the SEC in a circumstance like that one.”

Ms. Loewy believes that private company regulation by the SEC would not fit what the SEC is intended to do.

They would be making private companies like public companies. The whole point of a private company is that it's still in a formative stage; it's not in a position to be public. If you are going to allow individuals to be seed investors, that by definition is company formation. The reasons that individuals can't participate in private company solicitations is because of the SEC's role of protecting them from situations about which individual investors are not well informed. It could lead to a slippery slope of regulation that is a big burden on private companies, so it might negatively affect the formation of new companies.

Ms. Morrison agreed: “I don't believe the SEC should have additional oversight, that's not their job. Their job is the general public investing in public companies. I think for private companies the rules should be different.”

The interviewees recognized further expansion of the SEC to private companies could have a chilling effect on new company formation and flexibility.

Question 9: Some believe investors' activism/“overregulation” is causing a decrease in IPOs. Should you delay taking a company public?

Interviewees did not see a clear link between investor activism, an increased regulatory environment, and a decline in IPOs.

“If you need significantly more capital to advance the business, then that's the route that you have to go,” said Dr. Sherman. “I'd push it off as long as possible, because you enter a whole different regime. So, you just operate differently in different regimes when public versus private.”

Ms. Morrison commented,

I don't think it is fear of activism or overregulation. I think it might have to do with readiness to become a public company. If you go public and you are honest with your investors, then regulation isn't necessarily a bad thing. There is a component in private versus public companies that is fueled by greed. So, not regulating the rules to make it fair, it's more about what is driving the decision to go public. Are you motivated by employee retention, wealth creation, or long-term growth? If you look at the SEC, they are after fairness. Even with the Public Company Accounting Oversight Board (PCAOB), everybody reports exactly the same way.

Our interviewees acknowledged that life as a public company will be very different than their previous private company existence. There will be new SEC reporting requirements, a need for dedicated investor relations follow-up, the creation of committee structures, and the establishment of internal controls.

Mr. Raab said, “With the amount of money that's in the system right now, there's a viable approach that one could consider being private for a long time. So, if I stayed private—how do I make you money? I could provide a dividend to an investor as a royalty or provide the liquidity by getting acquired, which may be counter to my desire as a CEO or going public. So, I think there is a place for it but tougher than people think.”

Mr. Butler added, “A company that is functioning well across the board, is well capitalized, and doesn't have near-term capital issues, perhaps they can stay private. Being a private company is easier if you don't have near-term capital needs and you're performing well. That doesn't happen with most companies.”

Dr. Sherman could see both perspectives. “From a governance perspective, it may be better being public—you don't give too much power to too few people. On the flipside, strategically and operationally it's better being a private company, because you can take a long-term view and you are not at the mercy of quarterly earnings results. From a governance perspective, I don't know if private is better. It depends.”

In summary, the threat of shareholder activism or overregulation should not stand in the way of a company going public. While there is no right or wrong answer, the interviewees were able to highlight reasons for a private company board to delay going public as long as access to capital was sufficient in the private setting.

In one of our published 2018 articles, we outlined the reasons a private company might wish to go public. While the article focused on environmental, social, and governance (ESG) considerations, the decision process is similar.⁸ We said:

Setting the private entity up as an attractive acquisition candidate, taking the company public, or striving to remain a private entity, requires serious consideration regarding the impact of many ESG factors on the company's operations, the workforce, customers and investors.

Directors must discern which factors are most important because ESG strategies can enhance a private company's bottom line, just as it can for a public company.

Interviewees highlighted that some private companies aspire to go public or merge/be acquired to advance business interests and growth potential. In order to be more attractive to investors and buyers, there are three areas for consideration:

1. A private company should have a strong governance model and necessary controls in place to balance opposing interests and perspectives during discussions on moving toward an IPO.
2. The company should evaluate the additional scrutiny from investors, quarterly reporting pressure, and regulatory requirements, and find board members and staff that have the requisite skillsets for the new public company.
3. The company should set up a structure that addresses majority and minority shareholder issues in such a way that if dual-class shares are created in the IPO, a sunset provision is put in place at the outset.

Question 10: If a company wants to position itself to merge or be acquired, would governance standards be important?

Our interviewees were clear that governance standards are important. The key question is when the adoption of governance standards will be important. The review will include how pronounced they were at a private company, which may cause significant changes once the company goes public. They pointed out the necessity for a plan to go public, being desirable to start at least 12 to 18 months in advance to establish a framework, hire employees, and formalize the board and processes. Adam Epstein said private companies should start developing a corporate governance system in advance of going public: “Start earlier!”⁹ He cited statistics from the Stanford Survey, The Evolution of Corporate Governance: 2018 Study of Inception to IPO, in which 83 percent of companies said that they became serious about developing a corporate governance system as part of a plan to go public and 58 percent report that their leaders became serious about developing governance systems within two years of the IPO.¹⁰

“At the private level,” qualified Mr. Raab. “If there is a black box around compliance or a regulatory review or any of those things, you have to factor it into the IPO and determine how to value it. It is the same for acquisitions.”

Ms. Loewy said that it is important to “make sure boxes are checked from a governance perspective when becoming a public company. You need to ensure that there's enough history, as well as an independent board of directors with strong track records before taking it public. Then, you need to be prepared for the discussion about refreshing the board once the company goes public so that the VC investors with older investments will roll off. There is a need for more independence then.”

The Council of Institutional Investors (CII)¹¹ developed a set of Investor Expectations for Newly Public Companies to address the concerns when becoming a public company. Upon going public, a company should have a “one share, one vote” structure, simple majority vote requirements, independent board leadership, and a nonclassified board. CII expects newly public companies without such provisions to commit to their adoption over a reasonably limited period through sunset mechanisms.¹²

Interviewees recommended that governance standards be set as soon as possible to avoid unnecessary conflicts and to ensure equal representation around the board table.

Question 11: If a company wants to emerge as a public company, do you agree that any dual-class share structure should be avoided or sunsetted after a period of years?

One of the major trends causing considerable commentary revolved around dual-class share structures. We were curious if interviewees had opinions on the issue.

Mr. Raab was clear. “Dual-class should be sunsetted. I understand it early on, because of the sweat equity at a minimum that the original founders put into the company. You can't argue that the Google and Facebook founders have created an outstanding amount of investor value. It's challenging to address the issues at Facebook now because they have dual structure and the founder has significant ownership.”

Major corporate governance associations have taken a position against the creation of dual-class shares without a sunset provision. The Council of Institutional Investors (CII)¹³ and the International Corporate Governance Association (ICGN)¹⁴ have addressed the issue of dual-class shares in several documents on the organizations' respective websites.

Question 12: Would a six-month reporting period, versus quarterly, change your opinion?

“When a company is run properly, they don't lose that much sleep over the short-term fluctuations because they are not a true reflection of the business,” said Dr. Braunstein. “I'm constantly surprised by how many C-suiters watch their stock on a daily or even more often basis. I'm amazed at how much the larger employee base looks at those numbers so frequently. That's a whole different aspect that is not relevant in a private company.”

“A big difference from a public company perspective is how you communicate your deliverables, timelines, and milestones. You are much more under the microscope because you're expected to deliver, whereas in a small, private company it's easier to have flexibility.” said Ms. Lawton.

In summary, interviewees believe there is good reason to keep a quarterly reporting schedule. The key is to prevent it from becoming an exercise in short-term thinking, and to use the time to provide investors with key information on long-term strategies, including trends.

Question 13: If a private company wants to remain private, should governance standards be maintained and, if so, which standards would help the board and CEO?

“The easy answer is yes, because there's nuance around it,” said Mr. Raab. “You are likely to have a smaller board in a private company. It is a good practice to always have charters for committees in place. It's one way that the private company CEO can enforce those committee charters. It teaches the board and CEO about expectations. There is a lot of overlap for these committees. So, your board meeting really covers all of the work, but it is important to have a structure in place.”

Ms. Loewy agreed.

Yes, I believe that as much public company board structure as you can put in place in a private company is helpful, because you have committees—which are all about the people. The infrastructure is useful in a private company and probably helps to balance some of the power. It's particularly important in the Nominating and Governance committee, along with adding some strong independent directors to make sure that there's a balance across the different perspectives. Then, it's not all driven by a couple of major VC investors. That probably helps to provide a balance to the CEO.

Dr. Sherman mentioned that the creation of the “Audit Committee is definitely important. A Nominating and Governance Committee is also important as long as it doesn't slow things down. You need to strike a balance of board oversight and principles and practices.”

Dr. Braunstein said that he is a “big believer in checks and balances. I believe it's very good to have non-C-suite executives to review company policy. Better decisions are made, both on the public and private side.”

Maureen Bujno, author of “Three Lessons for Private Companies from Public Company Governance,” said,

Increasingly, private company executives are embracing the more structured governance processes used by their public counterparts. There's a challenge for closely held companies: strengthening governance without compromising the flexibility that many see as their primary advantage in the marketplace. While most public companies have clear rules and strict procedures to ensure everything from regulatory compliance to risk assessment, private companies may be wary of becoming too bureaucratic or beholden to process.¹⁵

As the challenges facing private companies grow more complex, many find that the board structures adopted by public companies can help to position them for long-term growth. For companies of all sizes, more formalized boards, with greater director diversity, are becoming standard. While private company needs vary widely based on size and business type, adopting leading public company governance can help companies move beyond insularity and invite fresh ideas for building business.¹⁶

In summary, private companies can withstand the pressure from private equity or venture capitalists to go public. There will be trade-offs when remaining a private enterprise which could be beneficial for the company.

Final Remarks

Each individual we interviewed counts working for, and serving on, a private company board as a personal and professional achievement. They told us that while the work is rewarding, it is also time-consuming and includes conflict. Then, why do it? Each reason is as unique as the individual. The risks may be great but the rewards (not necessarily monetary) are meaningful and worthwhile. Our interviewees were clear: There are no easy answers, no simple solutions to the demands of running a company. They are offering innovative and creative ideas—their expertise—filling the company's need. Regardless of monetary compensation, the satisfaction of a job well done is worth the headache. They told us that the burden is lightened when board members have the ability to effectively communicate with each other and investors are in alignment with the company's long-term growth potential. When there are disagreements, it can be caused by unequal company ownership tension. While that tension can lead to better dialogue, it can result in more short-term thinking and/or create long-term discontent among board members.

They also mentioned that the need for capital can be an all-consuming quest. When more capital is available, private companies may decide to remain a private enterprise longer or indefinitely. When they decide to go public, through the more traditional IPO process, or via the newer direct offering process (which is becoming more common), the need to establish a share structure that safeguards all investors is important.

Our interviewees valued the role that corporate governance plays in their work. We appreciate their candor and insight when responding to our questions and thank them enormously for their contribution to this chapter.

Acknowledgments

A sincere thank-you to those who provided valuable insight:

• Eleanor Bloxham, founder and chief executive officer of The Value Alliance Company and the Corporate Governance Alliance, a board and senior executive education, information, and advisory firm.
• Scott Braunstein, M.D., operating partner, Aisling Capital; member, board of directors at Esperion Pharmaceuticals, Ziopharm Oncology Inc., Marinus Pharmaceuticals Inc., Trevena Inc., ArTara Therapeutics, SiteOne Therapeutics.
• John Butler, CEO of Akebia; member, board of trustees at American Kidney Fund.
• Alison Lawton, CEO and president, Kaleido Biosciences; member, board of directors at ProQR Therapeutics and Verastem Inc.
• Caroline M. Loewy, member, board of directors at CymaBay Therapeutics Inc., Aptose Biosciences Inc., and PhaseBio Pharmaceuticals Inc.; founding board member of the Global Genes Project as well as KCNQ2 Cure Alliance Foundation; and member of the National Advisory Council of the Translational Genomics Research Institute (TGen) Center for Rare Childhood Disorders.
• Patricia B. Morrison, president of the board of trustees of Opera Columbus; member, board of directors at Splunk Inc., Aramark and Baxter International Inc.
• Michael Raab, CEO, Ardelyx; member, board of directors at Amicus Therapeutics, Tempest Therapeutics; former member, board of directors at Intarcia Therapeutics, Novalar Pharmaceuticals Inc., Novacea, and Cellgate.
• Melissa Sherman, Ph.D., CEO, MOBILion Systems Inc.
• Christi van Heek, managing partner, BIO Point Group; member, board of directors at Visioneering Technologies Inc. and Concert Pharmaceuticals.

Special thanks to Professor Richard LeBlanc for including us in this Handbook, as well as our dear spouses, to whom we owe a great deal for their patience and support.

About the Authors

Carol Nolan Drake, JD, is founder and president/CEO of Carlow Consulting, LLC, a business she started in January 2017 to provide consulting on corporate governance best practices, ESG, diversity, and federal legislative matters. The business advises institutional investors, companies, and other clients. She is a licensed attorney.

Carol worked for three Ohio governors, including appointments to the Governor's Cabinet and the OPERS board of trustees, the Ohio Deferred Compensation board, and the State Employment Relations board. She served as the chief external affairs officer for the Ohio PERS, overseeing corporate governance, research, and state and federal government relations. Carol previously worked as an assistant city attorney, assistant prosecuting attorney, and in private practice. She has served on several nonprofit boards.

She served five years on the Council of Institutional Investors (CII) board, elected as treasurer and chair of the Policies Committee. Carol was the cochair of the ICGN SHREC for three years, which updated the Diversity and Share Lending Guidelines. She has co-authored articles on ESG and governance best practices. The company is headquartered in Columbus, Ohio, with operations in Washington, D.C.

Sally J. Curley, IRC, is CEO at Curley Global IR, LLC (CGIR), and adjunct professor, Georgetown University, Executive Master's in Global Communications.

Sally leveraged her more than 30 years of experience to create CGIR, a unique consultancy for investor relations (IR), governance outreach, and environmental, social, and governance (ESG) programs. She is a strategic advisor to public, private, and nonprofit boards and has extensive experience with IPOs (traditional and tracking stock). While the majority of her experience has been in healthcare, Sally has worked for and represented companies in the high-tech, software, and retail industries. She has particular strengths in navigating disclosure pitfalls while assessing reputational and other risks, as well as in global project management.

Prior to launching CGIR in November 2017, Sally spent a decade in the role of senior vice president, investor relations at Cardinal Health Inc., one of the largest Fortune 500 companies. As a member of the company's senior management team, she built and ran the company's global IR efforts as well as created and co-led its ESG committee, responsible for identifying and advancing ESG initiatives. From 2010 through 2017, she was named a top officer in healthcare technology and distribution by Institutional Investor magazine and in 2012 was named one of Treasury and Risk magazine's “30 Outstanding Women in Finance.”

She serves as an advisory board member for MOBILion Systems, is a member of the Society for Corporate Governance ESG Working Group, and a former board director of the Columbus Zoo and Aquarium, where she sat on its Nominating and Governance Committee and chaired its Sustainability Committee.

Sally is a frequent presenter to boards, management teams, universities, associations, and the U.S. Securities and Exchange Commission on the topics of IR, disclosure, leadership, and corporate governance. She has served on numerous NIRI boards and committees, and in 2013 was named an NIRI Fellow.

Other Resources

1. The Alliance for Board Diversity and Deloitte, Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards. https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/missing-pieces-fortune-500-board-diversity-study-2018.html?id=us:2el:3pr:diversity:eng:boardef:011619.
2. Annalisa Barrett, Lecturer of Finance at the University of San Diego School of Business and at the University of California San Diego's School of Global Policy and Strategy, Women on Boards of Public Companies Headquartered in California 2018 Report. https://static1.squarespace.com/static/56e8489162cd944a6424f542/t/5c381bf51ae6cf0373787ece/1547181050858/California+Women+on+Boards+2018+Report+Final.pdf.
3. Asian Corporate Governance Association (ACGA). https://www.acga-asia.org/who-we-are.php.
4. McElhaney, K. A., & Mobasseri, S. (2012). Women create a sustainable future. Research sponsored by KPMG with Women Corporate Directors, Center for Responsible Business, Haas School of Business, University of California, Berkeley.
5. Morning Brew, November 19, 2018, per TechCrunch. https://www.morningbrew.com/latest/archive/2018/11/19/this-is-juicy-one/.
6. UK Leads in Bid to Raise Corporate Governance Standards with Launch of Code for Large Private Companies, Dina Medland, December 10, 2018. https://www.dinamedland.me/board-talk/uk-leads-in-bid-to-raise-corporate-governance-standards-with-launch-of-code-for-large-private-companies and https://www.mervynking.co.za/pages/cv.htm.
7. The Wates Corporate Governance Principles for Large Private Companies, Financial Reporting Council, December 10, 2018. https://www.wates.co.uk/wp-content/uploads/2018/12/Wates-Corporate-Governance:Screen_2018-2.pdf.
8. The Wates Corporate Governance Principles for Large Private Companies, Financial Reporting Council. https://www.frc.org.uk/directors/corporate-governance-and-stewardship/governance-of-large-private-companies. In January 2018, the government appointed James Wates CBE to chair industry Coalition Group tasked with developing corporate governance principles for large private companies. In addition, the chairman and the FRC engaged with industry leaders and held public events to raise awareness and seek input prior to consultation. The Wates Principles have been issued following a public consultation which ran from 13 June to 7 September 2018. The Feedback Statement (PDF) to the consultation was also issued on 10 December. Introduction of Financial Reporting Council June 2018, The Wates Corporate Governance Principles, p. 4. https://www.frc.org.uk/getattachment/48653f86-92c3-4cd6-8465-da4b7cac0034/;.aspx; Final Report issued in December 2018: https://www.wates.co.uk/wp-content/uploads/2018/12/Wates-Corporate-Governance:Screen_2018-2.pdf.