The past few weeks have witnessed extensive media coverage of two subjects for which investors should have taken extensive note: 1) There are an increasing number of high-profile companies whose shareholders are expressing dismay over corporate governance practices, and 2) high-profile initial public offerings (IPOs) have been drawing extraordinary interest from excited investors.
As I contemplate these two phenomena, I am struck by an interesting thought: Prospective shareholders do not scrutinize corporate governance nearly as often as shareholders who have lived with the governance of their companies over a longer period of time. I can’t help but wonder if investors who are caught up in the excitement and promise of IPOs aren’t missing an “elephant in the room”: What type of governance will the new company have once they own a piece of it?
A recent article published by the Harvard Law School Forum on Corporate Governance and Financial Regulation examined prospectuses filed with the U.S. Securities and Exchange Commission (SEC) by the 50 largest domestic IPOs between January 2009 and August 2011. These large companies were valued at between $132 million and $18.4 billion at the time they went public. The results were fascinating:
In fairness, many of these glaring shortcomings in corporate governance were only permitted by the listing exchanges or the SEC for a short period of time following the date of the IPO. Still, I have to wonder if potential investors paid much attention to the corporate governance models of these companies before making significant investments.
I tend to be a bit too conservative in my personal investment philosophy to invest in IPOs. And, far be it from me to give anyone financial advice. However, if I were to make such an investment, I would want to satisfy myself about more than the business model and earnings potential of the pending IPO. I would also ask some very critical questions about its corporate governance model. (All these questions don’t have to be answered affirmatively, but a pattern of “no” answers may require further scrutiny.)
I am sure there are many other characteristics of strong corporate governance that I have overlooked. However, the point of the questions provided above is simple: You are much more likely to be satisfied with the corporate governance model of the company in which you invest if you do your “homework” before you make the investment. It beats learning the hard way that the board and management of the company in which you have already invested do not share your philosophy on strong and effective corporate governance.
I welcome your views.