The role of the board of directors in corporate governance: Building IPO readiness
Corporate governance involves a combination of people, rules, processes and procedures to manage a company’s business. The role of the board of directors in corporate governance relates to the business’ ethical behavior and principles, to create long-term value and sustainability for all stakeholders.
For companies preparing for public markets, corporate governance has become significantly more complex. IPO preparation has become increasingly lengthy, with regulatory requirements that didn't exist a decade ago. This complexity means the role of the board of directors extends far beyond traditional oversight to encompass IPO readiness, audit committee formation, and sophisticated risk management.
Recent data from PwC reveals concerning governance gaps: only 35% of executives rate their boards as excellent in fulfilling governance duties, while CEO turnover reached 202 departures globally in 2024. For pre-IPO companies, these governance deficiencies can derail public market aspirations and damage investor confidence during critical growth phases.
Today's directors must balance stakeholder interests while steering organizations through digital transformation, regulatory changes, and evolving investor expectations. They create long-term value through strategic insight, risk management, and accountability frameworks that adapt to rapid market changes.
In this comprehensive guide, we'll explore:
- IPO-ready governance structures and oversight responsibilities
- Board composition strategies for public company transition
- The board's relationship with management
- How the board of directors handles the unique corporate governance challenges of pre-IPO companies
- Board management technology solutions that automate governance processes
The role of the board of directors in corporate governance
Corporate boards have many duties and responsibilities. In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders.
Good corporate governance relies on distinct differences in the roles between board directors and managers. Board directors were never intended to be directly involved in a corporation's daily operations, and they certainly shouldn't engage in micromanaging management. The main role of board directors is oversight and planning. Despite the differences, board directors may delegate certain powers to the CEO or CFO under certain circumstances.
Boards also regularly delegate some of their duties to board committees. Corporate board committees act as a subset of the full board. Committees devote the necessary time and resources to issues for which the full board doesn't have time. Committees delve deep into issues, often calling in experts to assist them. Committees provide regular reports to the board on matters they handle.
How the board of directors handles the unique corporate governance challenges of pre-IPO companies
To prepare for an IPO, the board of directors establishes:
- Formal committee structures with independent leadership
- Compliance monitoring systems that track SEC requirements
- Reporting processes that demonstrate regulatory readiness
- Risk management frameworks appropriate for public company complexity
Companies preparing for IPO face unique corporate governance challenges that differ significantly from private company requirements. Public market investors expect sophisticated board oversight, independent director leadership, and comprehensive risk management that many private companies haven't previously needed.
The transition from founder-led governance to independent board oversight represents one of the most critical shifts in corporate governance during IPO preparation.
These corporate governance foundations must be operational well before the IPO filing to demonstrate management capability and regulatory readiness to potential investors.
Critical governance areas for IPO readiness
Modern corporate governance demands extend beyond traditional oversight to address risk categories that can make or break IPO success. Pre-IPO companies must demonstrate board-level expertise across essential governance domains that public market investors now expect:
- Cybersecurity governance: Data breaches can derail public offerings, requiring board-level oversight of security frameworks, incident response plans, and risk assessment protocols.
- AI governance requirements: Companies implementing intelligent systems need board oversight of AI ethics, algorithmic accountability, and automated decision-making processes that affect operations and customer experience.
- ESG compliance: Environmental, social, and governance factors increasingly influence investor decisions and regulatory requirements. This demands systematic board oversight of sustainability initiatives, diversity programs, and stakeholder engagement strategies.
These governance areas often catch pre-IPO companies unprepared because private company boards haven't needed systematic oversight in these areas. Public market investors expect comprehensive governance across all risk categories, making early preparation essential for IPO readiness.
Board of directors structure
Early-stage boards usually include one or more founders. Boards are typically smaller in the early stages, with five to seven board directors having various areas of expertise. Odd numbers prevent tie votes, and each director gets one vote.
The size of boards typically increases with growth. It is often related to the corporation’s needs and the industry’s standard practices. As boards acquire investors, they usually offer the CEO a board seat. Some investors will also insist that they get a board seat to oversee their investments visibly. Investors also often influence the recruitment of independent board directors, who have an increasing influence on the board and the corporation as the company grows.
Company bylaws play a large role in establishing the size and structure of a board of directors. Bylaws are the formal rules that govern an organization’s operations, which include a minimum and maximum number of board members. These bylaws are determined by several parameters, including:
- The size of the organization
- Industry
- Governance needs
These bylaws may also determine board term limits and re-election policies to ensure new insights and diverse points of view.
Best practices for corporate governance encourage boards to offer the majority of board seats to independent directors. A diverse approach to board composition is essential, bringing a range of expertise, perspectives and knowledge that adequately reflect the broader concerns of various stakeholders, shareholders and local communities. Regulators, investors and others are also making a big push for boards to consider diversity in many realms, including age, gender, experience, ethnicity, race, religion, skills and experiences.
Directors usually retain their positions for two to six years, although this can vary.
There are several positions on the board, including:
- Chair
- Managing director
- Executive director
- Non-executive director
IPO-ready board structure requirements
NYSE and NASDAQ require majority-independent boards, with all audit committee members meeting strict independence criteria. Independent directors must have no material relationships with the company beyond their board service.
Additionally, NYSE and NASDAQ require that boards of listed companies have at least these three standing committees:
- Audit committee: Requires an independent chair with financial expertise and public company experience
- Compensation committee: Needs independence for executive compensation decisions and equity plan oversight
- Nominating and corporate governance (often called “nom/gov”) committee: Guides director recruitment and board effectiveness evaluations
Outside of the U.S., similar committees are required or recommended for public company boards. For example, the UK Corporate Governance Code recommends that boards establish a standing audit committee, remuneration committee and nomination committee.
Some director qualifications you should pay attention to include:
- Financial expertise: Understanding of public company reporting, SEC requirements, and investor relations
- Technology governance: Oversight of cybersecurity, AI implementation, and digital transformation
- ESG experience: Knowledge of sustainability reporting and stakeholder engagement expectations
- Crisis management: Experience managing public company challenges and shareholder communications
Governance documentation and policies
Company bylaws must be updated to reflect public company requirements, including committee structures, independence definitions, and director qualification standards. These governance documents provide the foundation for board operations.
Key governance policies required for IPO readiness include:
- Board charter defining roles, responsibilities, and meeting requirements
- Committee charters establishing oversight scope and reporting obligations
- Independence standards meeting exchange listing requirements
- Director qualification criteria ensuring appropriate expertise and experience
Articulating long-term plans for shareholders and stakeholders
The role of the board is to plan and strategize goals and objectives for the short and long-term good of the company and to put mechanisms in place to monitor progress against the objectives. In this regard, board directors must review, understand and discuss the company's goals. In particular, the board relies on independent directors to challenge the board's perspectives to ensure sound decision-making.
The board must be confident in its approach to addressing uncertainties and capitalizing on opportunities for the future while identifying and managing real and potential risks. To inspire trust from investors, board directors must be able to articulate their plans for the future so that investors have a clear picture of the long-term outlook.
The corporate board's role in stewardship
Board directors act as stewards of the company that governs the present times and provide guidance and direction for the future. In their role as overseers, boards must continually assess a variety of risks in the following categories:
- Financial reporting
- Reputation
- Litigation
- Ethics
- Technology
- Health
- Safety
- Environment
Effective corporate governance requires boards to develop written, clear descriptions of the roles of the board directors, the board chair, the CEO and the primary board committees. Boards should also develop and write policies for codes of business conduct, codes of ethics, environmental, social and governance (ESG), conflicts of interest and whistleblowing.
Overall, good corporate governance promotes equity and deters fraud and other deceptive practices.
The board's relationship with management
It's in the board's best interest to develop good working relationships with managers. Corporations run best when the board and senior management hold the same perspectives on strategy, priorities and risk management.
Communication is a vital component of good corporate governance. Boards must communicate clearly and promptly to develop a sense of mutual confidence and trust with their managers. It's important for board directors to have regular conversations with managers about risk mitigation and prevention.
Managers need to understand risks so that they can put processes in place to protect the company. Risk conversations between boards and managers should cover a span of risk areas, including:
- Economic risks
- Market risks
- Operational risks
- Acquisitional risks
- Dispositional risks
- Infrastructure risks
- Technology risks
- Reputational risks
- Disclosure risks
- Compliance risks
How AI technology transforms board governance
Modern governance technology has become essential for companies preparing for an IPO. It enables efficient processes and comprehensive oversight that would otherwise require substantial additional personnel.
1. Automating board preparation and documentation
Traditional board preparation for pre-IPO companies often consumes weeks of manual effort, with governance teams compiling information from multiple sources. This time-intensive process frequently results in delayed information that forces directors to make decisions based on outdated data during critical growth phases.
Diligent’s Smart Board Book Builder addresses these challenges by automatically gathering and organizing company materials, financial reports, and compliance documentation into professional board packages. The system reduces board book creation time from weeks to hours while ensuring consistency that demonstrates governance maturity to investors and auditors.
Meeting documentation capabilities include:
- Automated minute-taking and action item monitoring
- Decision tracking that creates audit trails required for public companies
- Real-time collaboration tools for hybrid board participation
2. Enhancing audit committee effectiveness
Audit committee preparation becomes significantly more efficient through AI-powered material analysis. Diligent’s SmartPrep technology analyzes board materials to generate targeted discussion questions for audit committee members, highlighting key financial issues, risk developments, and compliance matters that require attention.
Key benefits for pre-IPO companies include:
- Reduction in audit committee preparation time
- Better-informed directors through automated material synthesis
- More focused agenda management and discussion quality
3. Proactive risk identification and compliance monitoring
Diligent’s Smart Risk Scanner analyzes board materials and company documents in real-time to identify potential legal risks, regulatory compliance issues, and disclosure concerns before they reach board consideration. This proactive approach enables companies to address governance challenges early in the IPO preparation process.
Building IPO-ready board effectiveness with Diligent
The role of the board of directors in corporate governance continues evolving as pre-IPO companies face increased regulatory complexity and stakeholder expectations. Success requires boards that combine traditional governance expertise with modern technology capabilities that address public company requirements.
The most successful boards leverage AI-powered solutions that automate administrative tasks while providing directors with enhanced oversight capabilities. These platforms enable more efficient operations, proactive risk identification, and comprehensive compliance monitoring that support a successful public market transition.
Ready to accelerate your IPO preparation with AI-powered governance? Discover how Diligent helps pre-IPO companies reduce audit committee preparation time while identifying compliance gaps months before traditional reviews. Book a demo today to see our governance solutions in action.
