u/singhapura

I work in governance and wrote this some time ago:

I have just finished reading a 53 page IPO summary from one of the most consequential filings in years. Three operating segments, 4.694 Mio. USD of quarterly revenue, 28,5 Bio. USD of claimed addressable market, and a governance posture that would not survive a fit and proper review in any serious regulated market. The financial story is interesting. The governance story is the warning sign.

Let me make the case that governance is not optional decoration. It is the asset that quietly underwrites every other promise a company makes.

The Controlled Company Trick

The Nasdaq listing rules permit a "controlled company" exemption. Any company where one person or group holds majority voting power can opt out of the requirement for an independent compensation committee, an independent nominating committee, and an independent board majority. The only protection that remains is the audit committee, mandated separately by the Exchange Act. NYSE rules track the same exemption.

This is sold to investors as a normal structural feature. It is not. It is the removal of the three core checks that exist precisely because boards cannot police themselves when one person can appoint and remove them.

Look at the public market record. WeWork pulled its 2019 IPO when its dual class structure and Adam Neumann's related party transactions could not survive S-1 scrutiny. FTX, with no functioning board and no independent governance, collapsed inside a week in November 2022. Theranos operated for years with a board stacked with politically prominent names and zero technical or audit competence. The pattern is consistent. When governance is removed, the company becomes a personality cult with a balance sheet attached. It works until it does not.

Why Related Party Transactions Need Independent Eyes

The S-1 I read described two major prior mergers as "transactions between entities under common control." That phrase should make every governance professional reach for the file.

Common control transactions bypass arm's length pricing tests. They are accounted for at carrying value, not fair value. They do not require fairness opinions. They do not require special committees. They do not require independent counsel. They are, in plain language, the controlling shareholder moving assets between his own pockets and asking public investors to accept the valuation he assigned.

Greensill Capital is the cautionary tale that still defines the conversation. The collapse in March 2021 was not a market failure. It was a governance failure. Greensill financed receivables for GFG Alliance, an industrial group controlled by Sanjeev Gupta. The board did not adequately challenge concentration risk. Insurance cover was withdrawn. Credit Suisse supply chain finance funds lost roughly 10 Mrd. USD of investor money. BaFin found that Greensill Bank had no functioning internal controls on related party exposure and wound the bank up. The lesson is not that related party transactions are bad. Banks do them every day. The lesson is that without independent governance, related party transactions become the channel through which value leaks out.

Dual Class Stock And The Founder Veto

The dual class structure has been normalised in US capital markets over the past decade. Snap went public in 2017 with non voting Class A shares. Lyft, Pinterest, Palantir, and Meta operate with super voting structures. SpaceX has now filed Class B shares with ten votes each, plus a class right to elect a majority of the board for as long as a single Class B share exists.

The defence is always the same. The founder has a long term vision. The market is short term. Public shareholders should trust the founder to allocate capital wisely because he is smart and aligned.

The problem is that this argument has no off ramp. If the founder becomes distracted, ill, conflicted, or simply wrong, public shareholders have no mechanism to correct course. They can sell. That is the entire menu.

The CFA Institute, the Council of Institutional Investors, the International Corporate Governance Network, and the major proxy advisors have spent a decade arguing for sunset clauses on dual class structures. A sunset clause caps the super voting period at seven or ten years, after which all shares convert to one share one vote. This is the bare minimum a serious governance committee should accept. Many recent IPOs include them. The ones that do not are telling you something about who the company is being built for.

What Good Governance Actually Delivers

This is where the conversation usually ends. Governance gets framed as a constraint, a tax, a compliance overhead. That framing is wrong.

Proper governance delivers measurable value across four dimensions.

First, cost of capital. Companies with strong governance ratings borrow more cheaply, raise equity at better prices, and access syndicated credit on better terms. MSCI, ISS, Glass Lewis, and Sustainalytics have all published longitudinal data on this. The spread between top quartile and bottom quartile governance is real and persistent. Investors are not paying a premium for the certificate on the wall. They are paying for predictability.

Second, regulatory standing. Every major securities regulator on the planet, whether the SEC, the UK FCA, the Hong Kong SFC, the Singapore MAS, the German BaFin, or the European ECB, applies some form of fit and proper test to issuers, intermediaries, and significant shareholders. The OECD Principles of Corporate Governance, updated in 2023, set a baseline that listed company regimes around the world have converged towards. Strong governance is not a regional preference. It is the global price of admission to capital markets that work.

Third, talent. Senior compliance, risk, and finance professionals do not join organisations where their judgement can be overridden by a founder with no functioning board. They join organisations where they can do their work. The talent market has a long memory. Companies with governance reputations attract better people, and better people produce better outcomes.

Fourth, crisis resilience. Every organisation faces a moment when the headline turns against it. Boards with functioning committees, independent directors, clear escalation paths, and documented risk appetites survive these moments. Decorative boards do not. The post mortem on FTX, on Wells Fargo's account fraud scandal, on Boeing's 737 MAX governance failures, on Credit Suisse's emergency rescue by UBS, and on Greensill all read the same way. The governance was theatre. When the spotlight moved, the stage was empty.

The Global Floor

The OECD Principles of Corporate Governance, the UK FRC Corporate Governance Code, the ICGN Global Governance Principles, and the IOSCO Objectives all point in the same direction. Listed companies are expected to maintain an independent board majority, separate executive and supervisory functions, manage conflicts of interest through genuinely independent committees, and disclose material related party transactions with proper oversight.

The Nasdaq controlled company exemption is not a global standard. It is a US carve out that the rest of the world's serious regulators do not replicate at the same depth. When the Hong Kong Stock Exchange and the Singapore Exchange opened to weighted voting rights in 2018, they did so with mandatory sunset triggers and stronger minority protections than the US exemption requires. London's listing reforms in 2021 and 2024 admitted dual class structures but kept stricter conditions than Nasdaq's blanket carve out. The Frankfurt Prime Standard, the Tokyo Stock Exchange Prime Market, and the Australian Securities Exchange listing rules all require closer adherence to the OECD baseline than the US system can claim.

US capital markets, for reasons of their own, allow what these other regulators do not. That is a policy choice, not a sign that the rest of the world is overcautious. The regulated world has watched too many founder controlled vehicles end badly to accept the argument that governance gets in the way of innovation.

The Real Bargain

Strong governance is not a brake on ambition. It is the instrument that makes ambition credible. It is what allows a company to raise capital cheaply, retain serious people, operate in regulated markets, and survive its first hard quarter. It is what investors pay a premium for, even when they do not always say so out loud.

If you are a founder reading this, the question is not whether you can secure controlled company status. You can. The question is what you are giving up in cost of capital, talent retention, regulatory standing, and long term resilience to keep voting power you will probably never need to use.

If you are a board director, the question is whether you are providing real oversight or signing documents. The difference is not subtle. Greensill's board met regularly and signed all the right minutes. The bank was wound up anyway.

If you are an investor, the question is whether the discount on offer compensates you for the rights you are not buying. Often it does not.

If you are a regulator, the answer is already clear. Keep raising the bar.

Governance is not decoration. It is the asset that underwrites everything else. Treat it accordingly.

#CorporateGovernance #BoardOversight #IPO #Compliance #RiskManagement

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