Special-purpose acquisition vehicles (SPACs) have thrived in popularity over the past few years, offering a pathway to public markets that circumvents the complexity and scrutiny of the traditional initial public offering (IPO). Although initially attractive to entrepreneurs, retail investors, and institutional stakeholders, their fundamental structure presents significant post-merger (de-SPAC) governance risks. As these vehicles mature into public companies, unprepared for the rigours of public life, they expose deep-seated vulnerabilities in their governance frameworks. Understanding and addressing these risks is essential to preserving investor trust and ensuring long-term corporate health.
From Blank-Check to Public Entity: A Dramatic Transformation
Before exploring the governance gaps, it is essential to revisit the structural distinction of SPACs. At inception, a SPAC is a shell company without operational activity, specifically formed to raise capital through an IPO with the intention of acquiring a private business. The pre-merger phase operates under a unique incentive structure, with sponsors receiving a “promote”—typically 20% of post-IPO equity—while pledging minimal capital themselves.
The sponsor’s motivation to close a deal within the usual two-year window creates a misalignment with long-term shareholder interests. When a business combination occurs, the target company becomes publicly traded through the now fully formed SPAC, without the independent scrutiny and rigorous vetting processes typical of traditional IPOs.
This means that after a merger, the formerly private company enters public markets rapid-fire, often with immature systems, weak controls, and without a governance overhaul to meet public company standards. The transformation isn’t just legal or financial—it’s structural and cultural. And when this transition is rushed or underprepared, it breeds numerous governance risks.
Misaligned Incentives Between Sponsors and Public Shareholders
One of the most widely discussed concerns in SPAC structures relates to the inherent misalignment of incentives. Sponsors benefit when a deal is consummated, regardless of whether it adds value to shareholders. Because sponsors typically only lose their minimal capital investment if a deal is not closed, their downside risk is negligible relative to that of public investors.
Post-merger, this misalignment can manifest in weak oversight and underinvestment in governance capacities. If sponsors remain involved in the company post-deal, they may prioritise short-term equity gains over long-term governance stability. This tension is particularly dangerous in a newly public company lacking institutional stability. Some boards formed through SPACs carry over the sponsor’s ethos—optimisation for closing deals rather than operating and governing sustainably.
Furthermore, a sponsor’s access to inside information and control over the transaction structure often diminishes transparency for shareholders. The rushed nature of the merger limits time for public investors to evaluate the target’s governance practices and executive competencies before becoming full shareholders of the transformed company.
Inadequate Board Composition and Independence
The transition from private to public status necessitates a robust and appropriately experienced board to provide oversight on corporate strategy, risk management, executive performance, and disclosure practices. However, many post-merger SPAC companies feature boards that are not fit for purpose.
In several instances, board members in de-SPAC companies are carried over from the SPAC’s sponsor team. While these individuals may bring deal-making skills, they often lack expertise in the industry of the acquired operating company or in managing the complexities of a public entity. Board seats may also be handed to early backers or transactional brokers rather than genuinely independent directors with fiduciary rigour.
Furthermore, where directors are appointed by sponsors or major investors, their independence from management and their impartiality can be questioned. This diluted oversight can result in inadequate challenge to executive strategies, poor risk governance, and in extreme cases, complicity in ethical lapses or poor financial management.
The regulatory standards around board composition—unlike those for listed companies going public via IPO—often do not apply with the same intensity in SPAC structures. Thus, the drive to ensure at least majority independence, adequate committee structures, and relevant sectoral expertise may slip through the cracks, leaving shareholders inadequately protected.
Fragile Internal Controls and Reporting Infrastructure
One of the critical differences between an IPO and a de-SPAC process is the institutional preparedness of the company in question. Companies entering public markets through traditional IPOs are typically required to maintain Sarbanes-Oxley compliant internal controls, audited financial statements, and well-developed reporting protocols. This is often not the case in SPAC targets.
Many SPAC targets are early-stage businesses, venture-backed start-ups or high-growth companies with limited experience in rigorous finance, compliance, and internal controls. When absorbed into a public entity, these controls do not morph overnight; it takes significant effort, capital, and leadership to establish adequate financial controls and reporting systems.
This lapse has precipitated a slew of financial misstatements, restatements, and auditor resignations among de-SPAC companies. These issues are not just administrative—they cut to the heart of shareholder trust and market integrity.
Moreover, with weak internal controls, risks such as fraudulent reporting, cybersecurity vulnerabilities, and operational inefficiencies are escalated. Without a strong audit committee on the board, these problems may go undetected too long, leading to reputational damage and regulatory intervention.
Insufficient Disclosure and Transparency
Transparency is a cornerstone of effective governance, allowing investors to evaluate financial and non-financial performance, risk exposures, and strategic direction. However, SPAC transactions can obscure crucial elements of company information and performance potential.
During the de-SPAC process, financial projections are often emphasised as part of the marketing spin to attract shareholders. Unlike in regular IPOs, where “guidance” is cautiously employed, companies merging through SPACs often enjoy more latitude in issuing forward-looking statements. This can lead to overly optimistic assessments with little grounding in current operational performance, and sometimes, statements that border on promotional rather than informational.
Post-merger, these forward-looking projections might not be met. Weak compliance frameworks may fail to update the market on missed milestones or deteriorating fundamentals, further eroding investor confidence.
Instances of selective disclosure, inadequate ESG reporting, and a general reluctance to engage with shareholder concerns further magnify the transparency problem. For retail investors, who are often drawn to SPACs due to perceived accessibility and innovation, such opacity can be especially costly.
Executive Compensation and Accountability Risks
Another major governance failing in post-SPAC entities emerges around executive compensation. Many SPAC targets promise generous compensation packages to attract leaders capable of scaling the business. However, in the absence of robust compensation committees, best-practice benchmarking, and structural checks, these packages can quickly become misaligned with shareholder interests.
Executives may receive large bonuses or equity rewards triggered by short-term milestones such as the closing of the deal or artificial market cap targets, rather than long-term performance metrics such as earnings quality, return on capital, or stakeholder outcomes.
Without adequate clawback mechanisms or long-term vesting schedules, executives may achieve personal financial windfalls even as their companies underperform or face legal troubles. This was evident in several high-profile SPAC failures, where founders and executives departed within months of the merger, enriched but leaving behind companies struggling with integration, growth, and compliance.
Furthermore, rapid turnover of key executives post-merger—either because of cultural mismatches, performance concerns, or sponsor power struggles—destabilises leadership at a pivotal moment. This diminishes institutional memory, distorts strategy, and undermines investor clarity.
Regulatory Oversight is Catching Up, But Slowly
As the SPAC boom matures, regulators have started to take note. The US Securities and Exchange Commission (SEC), for example, has proposed rule changes aiming to level the regulatory playing field between SPACs and traditional IPOs, including more stringent disclosure requirements, liability provisions for forward-looking statements, and guidelines on fairness opinions.
While these adjustments signal an evolution in how regulators view SPACs, implementation lags, and enforcement rigour remain concerns. Many jurisdictions where SPACs operate have fragmented oversight. The global nature of SPAC structures—where sponsors, targets, legal advisors, and markets may span different countries—complicates enforcement.
Unlike traditional IPOs, where regulatory vetting happens before the public debut, SPAC mergers only attract statutory scrutiny post-completion, leaving a vital window for opportunistic behaviour.
In light of this, institutional investors and boards must proactively develop governance codes internally, rather than relying solely on regulators. Early engagement with experienced governance advisers, adoption of internal charters for board committees, and voluntary disclosures beyond legal minimums can mitigate the risks arising from this delayed regulatory evolution.
ESG and Stakeholder Governance Lag Behind
Modern governance expectations go beyond regulatory compliance and shareholder returns. Environmental, social, and governance (ESG) practices are increasingly considered core to a company’s long-term success. However, post-SPAC entities have largely lagged in incorporating ESG governance frameworks.
There are several reasons behind this. First, many target companies come from high-growth industries such as technology or electric vehicles, where ESG considerations may not be prioritised during the early growth stage. Second, SPAC mergers are focused around transaction completion rather than operational sustainability; ESG factors are often seen as an afterthought.
Boards composed of sponsors or financial engineers may lack ESG literacy, and absent a structured reporting framework, material issues such as supply chain integrity, data privacy rights, and environmental impact assessments are underreported. Where ESG risks go unmanaged, they can quickly escalate into reputational crises—whether it’s a labour scandal, data breach, or greenwashing allegation.
Given increasing scrutiny from asset managers and rating agencies, failure to prioritise ESG in governance discussions is a significant oversight that can compromise long-term investor interest and brand value.
Navigating Toward Governance Maturity: A Roadmap
Despite the concerning trends, SPACs need not be destined for governance failure. There are strategic steps that boards, investors, and advisers can pursue to bolster governance maturity post-merger.
First, proactive board restructuring is essential. Within months of the merger, the company must review and reform its board composition to enhance diversity, sectoral expertise, and independence. Mandatory board assessments, clear nomination processes, and committee formation (especially on audit, risk, remuneration, and ESG) all promote strong oversight.
Second, immediate investment in internal control systems is non-negotiable. Finance leadership must develop clear reporting lines, risk registers, and compliance protocols aligned with public company standards. Bringing in experienced CFOs and legal officers with prior public company backgrounds accelerates this process.
Third, the executive compensation framework must be revamped to align with performance over time. This includes establishing long-term equity plans, performance-based incentives, and termination clauses to protect shareholders from opportunistic management exits.
Fourth, transparency and stakeholder engagement must become habitual. Quarterly reporting cycles, open investor briefings, and honest narrative reporting—not glossy promotion—foster trust.
Finally, companies formed through SPACs should undertake ESG materiality assessments and adopt sustainability codes voluntarily. Not only does this align with emerging norms and investor expectations, but it also guides internal decision-making in managing reputational and systemic risk.
Conclusion
As the novelty of SPACs fades and markets mature, the long-term health of the companies born from these vehicles will depend largely on governance reform. While the de-SPAC process offers speed and flexibility, it often leaves governance architecture trailing behind.
Boards and stakeholders must now turn their attention to building resilient organisational structures, thoughtfully designed to manage risk, enhance accountability, and ensure transparency. The road ahead presents an opportunity—for SPAC-birthed companies to not just catch up with their traditionally-listed peers, but to craft a governance model that learns from recent missteps and leads from the front. In this way, the promised democratization of capital markets and innovation can be realised not merely through structure, but through substance.