Dear reader,
Welcome to the November 2017 edition of The Director’s Dilemma.
To read this email in a browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.
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This month our case study considers the dilemma of choosing between experience and potential when building a board for an IPO. I hope you will enjoy thinking through the key governance issues and developing your own judgement from this dilemma.
Umberto founded his company ten years ago and built a successful technology company with a product that is tested in the market and capable of further development. Potential exists to take the product global; Umberto needs to move fast to retain the advantage of IP and know-how that can't be easily replicated. An IPO is planned within twelve months and Umberto is confident his business will make a smooth transition from private to public company status.
Umberto has an advisory board with a range of skilled directors, each of whom adds considerable expertise in a relevant topic. He has benefitted greatly from their insights, and plans to convert this group of people into a governing board as he goes through the listing process. He is keen to add a new person to his board and has spoken with an ambitious bright young executive who has recently returned after five years in Asia selling a technology similar to Umberto's product.
The broker advising on the IPO told Umberto that his board are a -bunch of unknowns” and unlikely to inspire the confidence of private equity investors and small funds that are the target market for his equity raising. The broker suggests appointing a 'household name' director from a large listed company. He admits that this person would not add much to the strategic competence of the board but claims they would help to bring in investors.
Umberto is in a quandary; he feels it would be disloyal to back out after his discussions with the young potential director, can't justify bringing in two new directors, and doesn't want to lose any of his existing team. He understands the merit of the broker's suggestion. Should he choose experience and reputation or energy and ability?
Umberto has 10 years successful experience developing his technology company, and expects to list in the next 12 months. Assuming market conditions remain suitable, Umberto would do best by taking up the listing Brokers' advice, and appointing a household name to his specialised Advisory Board.
Directing a listed company is very different to the commercially focused and often ad hoc advisory board arrangements of a young start-up. Umberto should take a close look at his advisory board and ask himself if, were it not for their past contribution, he would consider them the best choices for his board at the present time. He should also talk with each advisory board member to ascertain their appetite for becoming a statutory board member, particularly through the due diligence and listing process which is time consuming and hard work even for a well run start up.
Umberto has a problem many start-up founders can only dream about. Firstly, he has a competent and sound group of advisory members, secondly an additional experienced member who is ready to join and lastly the possibility of a public listing (though he should not discount the option of staying private and obtaining the necessary capital, either through investors or institutions, to fund expansion).
"Experience is a wonderful thing.
