Going public is a significant and critical step in a company’s progression. Companies choosing to embark on this journey, often tend to see governance and compensation as an afterthought. However, as research confirms, good corporate governance and appropriate compensation constitute important cornerstones for providing investors with confidence in the company’s sustaining success.
However, as research confirms, good corporate governance and appropriate compensation constitute important cornerstones for providing investors with confidence in the company’s sustaining success.
Going public means being accountable not only to increasing stakeholder demands but also to a broader spectrum of stakeholders. While most private companies are mainly accountable to their management, owners, and employees, public companies open themselves up to additional stakeholders. These are – among others – shareholders, the public, as well as proxy advisors.
Public companies are significantly more exposed to a wider set of opinions concerning their governance and compensation decisions. Changes are closely supervised, and if not accepted or comprehensible, could induce dissatisfaction and distrust among some of their stakeholders. If shareholders e.g. were to be dissatisfied with the structure and level of the company’s compensation system, this could later lead to lower Sayon-Pay votes at Annual General Meetings (AGMs) or even to the sale of shares.
Shareholders and proxy advisors expect companies to disclose governance and compensation-related matters cohesively. This means that when e.g. Executive Committees’ (ExCo) variable compensation is performance-tied, companies would be expected to communicate and disclose not only the performance criteria tied to this variable compensation, but also the degree to which performance targets may or may not have been met.
Not meeting stakeholder expectations could lead to reputational damage. Reputation is highly dependent on the wider public and media’s opinion of the company’s practices; also, with regards to publicly available data on governance and compensation. Though not directly linked to the immediate demands to be met, the public’s opinion must also be managed, due to the implications it may bear on further business.
Once Swiss-based companies go public, the regulatory requirements and environment they are exposed to changes as well. Independent of their location of listing, the Swiss Ordinance against Excessive Compensation in Listed Stock Companies (VergüV) – aimed to increase shareholder voting rights – will become relevant to these companies upon listing. Rights invoked to shareholders under this ruling, include, but are not limited to an annual vote of Board of Directors (Board) and Compensation Committee composition. According to this legislation, shareholder approval is also required on maximum aggregate compensation amount for the Board as well as for ExCo. The compensation report is also expected to be voted on for approval.
Regulatory institutions as well as security and exchange commission (e.g. SIX, Swiss Code of Good Corporate Governance) demand a thorough adherence to their respective requirements (e.g. Directive on Corporate Governance) and generally heightened attention to riskmitigating efforts.
In sum, a proper understanding of requirements needed to be met and proactive stakeholder engagement management are key to coping with the increasing number of requirements a company faces once becoming public.
One must note that what may work for privately owned firms may not necessarily work for publicly listed companies.
Each stage in the listing process and beyond requires careful planning and attention; setting the right focus on governance and compensation-related topics.
Thinking ahead in terms of governance and compensation-related topics – during the growth stage – lays the basis for a smoother transition into public life. Moreover, research shows that shareholder-oriented, transparent governance structures at the time of an Initial Public Offering (IPO) are associated with both a higher initial company valuation and better long-term performance
As companies strive to further grow and eventually go public, they ought to introduce more structured and formal decision-making and oversight processes, helping them better mitigate inappropriate risk-taking and set up compliance management processes. An effectively developed corporate governance structure requires time and attention and is often implemented two to three years prior to going public.
As private companies’ Boards are commonly composed of mainly non-independent founders, investors and management, scaling up the Board with independent members often constitutes one of the first steps to strengthen their governance. It also closes the gap towards the expectation of having a majority of independent members in the Board, as described in the Swiss Code of Good Corporate Governance (article 12, 14) once public.
Other gaps that companies may be able to bridge, include diversity, internationality, professional experience, expertise and the size of the Board. Furthermore, depending on the company’s specific situation, it may not only need to amend the Board’s composition, but also that of other key functions in the organization to affront the requirements ahead as a publicly listed company. Companies further advanced in the growth stage may even consider onboarding a Group Counselor or introducing an Internal Audit function.
Additionally, the implementation of internal control systems (ICS) and the shift toward internationally accepted accounting principles e.g. IFRS, typically also takes place during this stage.
Although companies entering the pre-IPO stage will have already updated and further developed corporate governance structures. These, as well as current compensation systems, should nonetheless be more concisely reviewed in light of the upcoming IPO.
One way to effectively pursue the necessary review is by executing a readiness check for governance and compensation topics. This constitutes an opportunity to assess the company’s hereto related practices’ alignment with regulatory requirements, market best practices and potential investor expectations, prior to the required consequential disclosure as companies become publicly listed.
In a first step, governance structures need to be assessed in context of their accordance with the post-IPO strategy, as well as the fulfillment of specific regulatory requirements relevant to public companies. This consists of the Board’s composition (e.g. target size, board independence prior to listing, nominating a chairperson), as well as its respective roles and responsibilities.
Secondly, the review of corporate documentations incorporates – among others – the amendment of the Articles of Association (e.g. organization of the company, and if applicable, foreseen conditional capital as reserve for future equity plans, reserve amounts for new hires, and specification on voting regimes, etc.), and the formalization of the Organizational Charter as well as the respective Committee Charters (e.g. Audit, Compensation, Nomination and Governance Committee).
In a third step, the company should also review their current employee ownership structures. Going public bears the advantage, that the spectrum of available compensation instruments widens. PreIPO, private-company compensation schemes are normally characterized by heavily equity-award driven compensation, including the use of e.g. phantom shares and options. These are generally distributed among a narrowly eligible group of people – usually founders and top management. With the introduction of the company onto the stock market, companies can now make use of e.g. effective performance-based equity participation plans. In so doing then, companies will consequentially necessitate amending existing variable pay plan regulations, as well as adjusting former shareholder agreements.