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Preparing to go public
so adoption of a clawback policy is not
yet mandatory. Nonetheless, as a result
of shareholder proposals and good
corporate governance practices, many
companies have begun to implement
and publicly disclose clawback policies,
although not necessarily based on
the Dodd-Frank model. Accordingly,
a company preparing for an IPO may
want to consider implementation of a
clawback policy.
2.5 NYSE Governance Services:
Reviewing and verifying your program,
meeting regulatory standards
NYSE Governance Services
In anticipation of an IPO, a company
should review and verify its internal
readiness from an ethics and compliance
standpoint, specifically taking into
account the requirements of the seven
“hallmarks” set forth by the U.S. Federal
Sentencing Guidelines for Organizations,
as amended (FSG). 15 Compliance with
the FSG is vitally important since it
can lead to a reduced sentence for
organizations convicted of a federal crime
if the organization can demonstrate
that, notwithstanding the violation, it
had an effective ethics and compliance
program in place. In addition, each listed
company must have a code of conduct
and ethics complying with SEC rules
and market listing requirements that is
applicable to all directors, officers and
employees. Therefore, having a truly
“effective compliance and ethics program,”
as set forth by the FSG, is one of the
most important first steps in planning an
organization’s IPO.
According to the FSG, an effective
compliance program is one through
which an organization exercises “due
diligence to prevent and detect criminal
conduct” and otherwise promotes “an
organizational culture that encourages
ethical conduct and a commitment to
compliance with the law.” It is important
to note that the FSG do not require that an
15
See generally United States Sentencing
Commission, Guidelines Manual (“USSG”), and
Chapter Eight –Sentencing of Organizations
(Nov. 2010).
effective program catch every instance of
criminal conduct; rather, the commission
emphasizes the need for a program that
is “generally effective in preventing and
detecting criminal conduct.” The FSG
set forth seven factors used to evaluate
a program’s effectiveness, including
written standards, board oversight, highlevel
personnel assigned to program, due
diligence, training and communication,
monitoring and auditing and enforcement.
It is important to note that these are
considered minimum requirements.
Any program that fails in one of these
categories would not be deemed effective,
although the FSG do allow the size of the
company to determine the formality of its
program.
In order to assess a company’s
readiness for an IPO from an ethics and
compliance perspective, it should take into
account the requirements of the seven
“hallmarks” set forth by the FSG, review
and update the company’s ethics and
compliance program and confirm that the
organization meets all requirements for a
truly effective program.
To address these hallmarks while
preparing for IPO, the company should
consider the following:
• Written standards—develop
appropriate written standards, policies
and procedures. If the company
already maintains a code of conduct
or other policies addressing ethics and
compliance issues, review and verify
that all areas are up-to-date and reflect
best practices, as appropriate.
• Board of directors oversight—
delegate oversight responsibility
to a subcommittee (e.g., the Audit
Committee or the Corporate
Governance Committee) and adopt
or amend committee charters, as
appropriate.
• Ensure that a compliance officer
is regularly reporting to a
subcommittee of the board (i.e., at
every regularly scheduled meeting
and more often as necessary) and
that the subcommittee is regularly
reporting to the full board (i.e., at
every regularly scheduled meeting
and more often as necessary),
both of which have had detailed
discussions as a group about the
content, format and functioning of
the compliance program.
• Provide code of conduct and
relevant policy training to the
board. The FSG do not require
that the board complete the same
training program administered to
the organization’s employee base.
Rather, the FSG state that the
board should be “knowledgeable
about the content and operation
of the compliance and ethics
program.”
• High-level personnel assigned overall
responsibility for the program—assign
responsibility for the compliance
program to an appropriate high-level
individual.
• Note that the FSG specifically
require that the individual(s) given
operational responsibility have
adequate resources, appropriate
authority and direct access to the
governing authority or subgroup
thereof. Many companies have
gotten themselves into trouble
(e.g., Fannie Mae) when senior
management has attempted to
interfere with the compliance
officer reporting directly, for
example, to the chair of the audit
committee without “clearing” the
report through senior management
first. Under the stipulations of the
FSG, this is not adequate.
• Additionally, the FSG require that
anyone who the organization knew
or should have known had engaged
in illegal activities or other conduct
inconsistent with an effective
compliance and ethics program
should not be included among the
group of individuals charged with
responsibility for the compliance
program. A robust program under
the FSG would perform background
checks upon hire and additional
screening upon promotion and
would require annual conflict of
interest certifications in which
those individuals responsible both
for oversight and operations of the
compliance program would disclose
any government, vendor, customer
or competitor conflicts, board
memberships and substantial gifts
NYSE IPO Guide
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