Corporate Governance in advance of an IPO
This chapter addresses a common mistake made during the initial public offering (IPO) process: corporate governance as an afterthought.
Corporate governance plays a key role in preventing corporate crimes, adding shareholder value, ensuring financial health and assisting in long-term sustainable growth. This chapter includes (1) a comparison of Australia’s corporate governance regimes to similar corporate governance regimes in the U.S. and the U.K.; (2) a case study on the cost of poor corporate governance based on lessons from the collapse of HIH Insurance Group (HIH); (3) the importance of a robust corporate governance regime in advance of an IPO; and (4) what companies listing in Australia should consider when implementing their corporate governance systems.
At a recent Governance Institute of Australia event hosted by the AustralianSecurities Exchange (ASX), Kevin Lewis, group executive and chief compliance officer of ASX Limited, remarked how ‘governance failures typically result in financial failures’. He was referring to the importance of corporate governance and learning from past failures, such as the collapse of HIH Insurance Group. (His speech, ‘My Governance Journey’, was delivered at the Governance Institute of AustraliaNew South Wales Graduation Ceremony, ASX Exchange Square, 22 November 2017.)
The Royal Commissioner Justice Neville Owen’s examination surrounding the failure of HIH was instrumental in shaping corporate governance in modern Australia. Owen described ‘corporate governance’ as ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account’ (HIH Royal Commission, in The Failure of HIH Insurance, Volume 1: A Corporate Collapse and Its Lessons. Canberra: Commonwealth of Australia, April 2003, p. xxxiv).
Responses for global regulators and governments to prosecute and impose fines and increase taxes on entities with poorrecords is testament to the importance of adequate corporate governance. Poor corporate governance can result in significant cost for entities, and punishments range from fines to imprisonment for officeholders.The pre-IPO stage provides a perfect opportunity to adopt appropriate policies and practices before the entity is in the public eye and under the review of shareholders and a market operator. Establishing effective corporate governance in advance of an IPO is important to start your listed company’s journey on the right foot.
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