The preparation for life as a publicly listed company is an important step for any company considering an Initial Public Offering (IPO) or any other capital raising process. It means acknowledging that what worked for a privately-owned firm may not necessarily work in public life.
This also includes careful consideration of governance and compensation-related topics, especially relevant to the Executive Management (EM) and Board of Directors (BoD) for fostering investor trust in the company’s sustainable success and growth. For this reason, each stage toward the listing, and beyond, requires careful planning, including alignment of other workstreams with governance and compensation-related topics.
Companies preparing for an upcoming IPO are advised to carefully manage this long-term transformational process – and start early! The process consists of a series of planned, profound changes, ideally undertaken as early as two to three years prior to going public. In this regard, HCM International proposes splitting the process from conception to realization into four stages – each with distinct considerations (see illustration below) – to maximize the readiness of both your governance and compensation:
Research shows that shareholder-oriented, transparent governance translates into a higher initial company valuation and sustainable performance. The BoD should fulfill independence requirements as well as other public stakeholder expectations; including the appropriate skillset representation.
Overall, the purpose a company should pursue in this stage is that of gradually bridging gaps in the system to market requirements expectations of listed companies.
Once the IPO intent has been formed, you should feel encouraged to review and align your compensation framework as well. This should also be aligned with the overarching business strategy (as should the governance structure) and regulatory requirements relevant once public
The pre-emptive establishment of a sound governance and compensation framework gives you the possibility to adapt to public listed life more rapidly, as well as to evolving market practices. Additionally, the pursuit of such adjustments is ordinarily easier as a private company; also considering the signaling advantage of maintaining stable structures once public. The flexibility for change will typically be larger as the stakeholder accountability landscape is more concise as a privately held company (i.e., exposed to fewer stakeholders). This allows for more agile responses to address adjustments in view of the IPO.
This stage is also largely consumed by specific pre-IPO preparations. These include handling outstanding compensation awards which could be triggered by a change of control event, finalizing the IPO prospectus for the impending investor roadshows, and developing Say-on-Pay budgets for the BoD and EM.
Communication gradually gains in importance, starting as early as the prospectus draft (red herring) elaboration or roadshow during the pre-IPO stage. The peak of its importance is usually reached during the first year after listing. The extent to which your company communicates both with their internal and external stakeholders increases as you become accountable to a larger audience.
Over the last years, public companies have become even more accountable to their stakeholders on governance and compensation topics through proper disclosure and communication. Internally, this means that the BoD and EM should take the opportunity to communicate and explain the company’s strategic objectives, which should also be reflected in the variable compensation. Externally, stakeholders demand tailored information on a diverse set of subjects on a regular basis.
The governance and compensation reports are two main instruments for communicating information on said subjects to shareholders, whereas Say-on-Pay shareholder rights – exercised during Annual General Meetings (AGM) – represent the shareholders’ direct communication with the company. Preparing the first AGM requires special attention, as items such as the maximum aggregate compensation amounts for the BoD and EM are bindingly voted on.
After surpassing the first year of listing, it is important that your company warrant its shareholders a degree of sustainability in the governance and compensation practices (i.e., maintain stable structures). The post-IPO strategy should extend also to these practices, and in so doing maintain the value and benefits of the IPO both for the company itself, as well as its shareholders and investors.
In a public company life setting, BoDs will be required to remain upto-date on recent market developments. To this end, BoDs will often bring on an independent, external advisor to facilitate this process as well as offer additional market insights. This allows the BoD in its totality to properly pursue all their duties and responsibilities.
