Corporate Governance: Part I
To address investor concerns, emerging companies are being forced to re-examine key practices related to corporate governance such as: board oversight, financial reporting, internal metrics and controls, and corporate values. To address the practical issues associated with these complex topics, Antiphony is launching a three part series on corporate governance.
In this first issue of the series, Jeffrey Babin, Founder and Managing Director of Antiphony, discusses how new corporate governance reforms are impacting private companies.
As always, we hope you find this information valuable. If you have any thoughts or suggestions, please contact us at insights@antiphony.com.
Changing Investment Climate Brings
Increased Scrutiny for Emerging Companies
Jeffrey Babin
is Founder & Managing Director of Antiphony (www.antiphony.com),
a strategic consulting firm that helps entrepreneurial companies succeed.
He also serves as a Lecturer in Entrepreneurship at The Wharton School.
Venture capitalists have traditionally exercised varying degrees of legal and operational control over the companies they fund. However, as the investment climate has become increasingly subdued over the past year, many venture capitalists are stepping up their involvement and oversight of the companies they fund in order to minimize their risk and protect their investments.
In the hey-day of early 2000, bullish investors eagerly poured money into early stage companies, often without digging deep into the operational aspects of the business to look for potential red-flags.
Today, gun-shy venture capitalists, looking to ensure a greater degree of certainty of the outcome of their investments, are taking a much more active role in scrutinizing companies to identify problematic issues or potential conflicts of interest prior to investing. And, depending on the overall vitality and financial well-being of a company, investors may attach stringent covenants to the terms of their financing such as, spending limits, debt limits, limits on management compensation, board control, etc.
This increased investor scrutiny promises to continue given the recent wave of corporate scandals and the resulting governance reforms. Publicly traded companies are now digesting a proliferation of new corporate governance regulations such as the recently enacted federal law known as the Sarbanes-Oxley Act. Under this new law, executives and board members of public companies will be held to higher standards of accountability for ensuring adequate internal controls as well as corporate auditing and financial reporting practices.
Private companies, while not covered directly by these new regulations, are feeling pressure to comply with them from their investors, who place a premium on private firms that conduct themselves like public companies. Increasingly, investors will stipulate that private companies appoint financially-literate and independent directors to their boards as well as follow key corporate governance practices such as forming audit and compensation committees.
In short, given the current business climate, emerging companies can expect more rigorous and ongoing scrutiny from their investors. Savvy private companies must take the time to understand the new corporate governance regulations and assess what they need to do to comply with these requirements. In the long run, companies who adopt these new corporate governance practices will be more attractive to prospective investors and better positioned for future growth.
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