It’s all too easy to get out of your depth when switching from a private to a listed company

It’s all too easy to get out of your depth when switching from a private to a listed company

At the tail end of last year, advisers were confident that 2010 would herald a stampede of companies listing on the main and junior markets. It never quite materialised.

Mark Cleland (pictured), managing director of Capita Company Secretarial Services, says that in the second quarter of 2010, the IPOs that had been hotly anticipated may finally emerge from those mysterious “pipelines” so often referred to by advisers.

‘In the past few weeks we’ve seen activity ramp up again, and I think that IPOs will be happening pretty soon. Initially, we’ll see one or two companies testing the waters, and then others will follow,’ he says, noting that a lot of interest is coming from offshore businesses, with a preference being for a listing on the Main Market.

For those CEOs who are considering a listing, now may be the appropriate time to start getting a business fit and ready for life as a publicly quoted company. ‘The lead-in time to a float can, on average, be up to two years, and companies should expect one year at the very least between decision and execution,’ says Cleland. ‘It depends on the size, sector and structure of the business, the method of flotation used, and the degree and complexity of the due diligence process.’

In practice, this means that a private business has to be shaken up and essentially run like a public one before it goes to market. The financial controls, accounting systems and governance structure must be of a sufficiently high standard to meet investor expectations and to ensure that the company meets its continuing obligations as a listed company.

Additional consideration needs to be given to the strength and abilities of the management team and ensuring that quality non-executive directors are brought onto the board, preferably those with industry savvy who will help gain kudos in the City.

‘One of the biggest mistakes is to underestimate the time and cost involved in the whole flotation process,’ says Cleland. ‘People think that life will be the same and that listing is really only about increased access to capital and extending their investor base, but it’s a hugely different regulatory environment from a private company.’

Investor demands

The communication requirements from investors are demanding, and any mistakes or off-key messages can have a disastrous impact on the share price. ‘It’s a huge change,’ he states. ‘Making announcements to the market; managing the increased reporting requirements – the onus is on the directors to be transparent and visible, and it’s difficult for directors of newly listed companies to understand what investors expect and require.’
Within the business, the CEO and chairman will need to ensure that governance systems are robust. ‘The reporting requirements and restrictions on directors will increase,’ says Cleland. ‘Many of the directors that have been around for a while within listed companies appreciate the value of transparency and good disclosure, but it’s harder for directors that have come from a private company environment and are switching to a listed company to see the benefits, often viewing it as an invasion of privacy.’

Good governance

There are a number of proposed changes in the offing which CEOs will have to keep track of if taking a company public, namely alterations to the Combined Code – which the Financial Reporting Council, as part of its recent review, has proposed to rename the UK Corporate Governance Code – and the introduction of the Stewardship Code for Institutional Investors (SCII). Cleland welcomes the idea behind the latter, arguing that it’s good for the responsibility for governance to be shared rather than focused solely on the issuing company and their directors.

‘It’s to help ensure that the institutions have policies and guidelines in place for engaging with directors of investee boards and that there is increased dialogue between the two parties. Increased engagement will help to improve the performance and governance of companies and the efficient operation of capital markets, and should go some way to repair confidence,’ he says, adding that the SCII is still in the consultation phase.

The suggested changes to the Combined Code by the Financial Reporting Council also remain fiercely contested, particularly the proposal for either the chairman or the entire board to be put up for re-election at each AGM, as opposed to the current position of directors retiring by rotation every three years.

Cleland admits he has doubts about this proposal as it might encourage short-termism from directors and be open to abuse from shareholders. ‘At the far end of the scale, it could lead to a situation where the whole board is voted out,’ he says. ‘It just doesn’t seem to lend itself to stability and the enhancement of long-term value for shareholders.’

Fine lines

Ever since the Cadbury Report in the early 1990s, the UK has tried to strike a balance between formal compliance and self-regulation for listed companies.
Cleland says that it is important for directors to move away from treating governance as a ‘box-ticking exercise’, but it is hard to ever envisage a time when directors will lovingly embrace standards and legislation that are often time consuming and costly.

In short, a CEO’s reasons for taking a company public have to be stronger than ever. Says Cleland, ‘You have to think about what potential investors want to see from the new company. It’s not just about a healthy balance sheet, although clearly that helps – there must be strong evidence of financial controls, a clear long-term business strategy and a robust governance structure to take the business through flotation and beyond.’

The other point to bear in mind is that the flotation is simply the beginning. ‘Directors have to be prepared for what is going to be expected of them once the company is listed,’ he says. ‘The continuing obligations are far reaching, and as soon as you consider going public, take outside advice as early as you can.’

Mark Cleland is managing director of Capita Company Secretarial Services, which specialises in helping companies through the IPO process and beyond. He can be contacted on 0777 504 0047 or email mark.cleland@capita.co.uk