UK: Company Directors: The Pitfalls Of Preparing To Float

Last Updated: 8 August 2017
Article by Pippa Begg

Ensuring the board is prepared can ease the arduous process of taking a company public, says Pippa Begg of Board Intelligence.

Taking a firm public by floating its shares on a stock market and signing up to all the rules and regulations demanded by the operators of that market, such as the London Stock Exchange in the UK, can be daunting for company directors if they are unprepared.

If the float is in the UK, the firm will not only have to satisfy the exacting demands of London Stock Exchange membership, it will also have to meet the equally strenuous requirements of the UK Listing Authority and be ultimately answerable to the Financial Conduct Authority, which keeps a close eye on publicly quoted companies.

It is no exaggeration to say that floating a company on a stock market puts directors and senior management under some of the highest pressure they will experience in their corporate careers.

A chief executive of a relatively small financial technology company that listed its shares on the London Stock Exchange's junior company market AIM conservatively estimated he had processed at least 200,000 separate sheets of A4 paper during the float.

Prepare for onslaught

Few directors, even those who have been adequately forewarned, are prepared for the onslaught that accompanies the process of going public.

Suddenly they are working with a much-expanded team of advisors that goes well beyond their close-knit group of accountants and lawyers, some of whom will regretfully need to stand down and be replaced by those with the requisite experience of public markets.

In the weeks running up to the float, there will be many meetings to select team advisors, the most important being the sponsoring stockbroker, which will lend its name and reputation to support the float, as well as its ability to raise money at flotation if that is part of the firm's growth plan.

"Be warned, do not expect the broker to be a friend during this process"

The broker will prefer working with advisors it knows and trusts to do a good job, and will strongly recommend its favoured ones, from reporting accountants and corporate lawyers to financial public relations consultants. The stockbroker is unlikely to yield to a request from a floating company to retain some or any of the previous home team if it thinks they might not be up to the job.

Each set of advisors has a vital role to fulfil, will demand the attention of the chief executive and finance director from the word go, and will equally not want to waste time while the firm gets itself ready or struggles to lay its hand on key information.

Be warned, do not expect the broker to be a friend during this process; it may come as a bit of a shock to experience some of the broker's tough love.

It is a rule of thumb that the larger the company seeking to go public, the longer it will take. For a small AIM float, the minimum amount of time would be about four or five months, and that depends on having the right board members already in place, including at least two independent directors.

It also requires full-time senior executives to be up to speed with all aspects of the firm, such as the key financial facts and figures, as well as its forecast performance. They also need to demonstrate a good working knowledge of close rivals and the health of the overall marketplace, including a feel for headwinds or regulatory changes that might affect the future performance of shares.

Intimidating scrutiny

The reason for being in control of such a level of detail is to show resilience and to be able to stand up to the potentially intimidating scrutiny of would-be investors, such as extremely well-informed fund managers, who are the guardians of the large sums of money controlled by pension and insurance companies.

Large floats take much longer. Currently Saudi Aramco, Saudi Arabia's state-owned oil company, is looking to float just 5% of its shares on a world stock market, or markets, which are reputed to value the firm at least one trillion dollars.

Although details in the public domain are few, its float is likely to have been in the planning stages for at least two or three years, and the company is still to announce which international markets to list on – although the London Stock Exchange's Official List is reported to be its favoured main market.

One of the biggest challenges during a float is to ensure the company continues to run well, especially when the attention of the main board directors is being commandeered by advisors. Board time will be squeezed more than ever, so it is essential to ensure the board not only operates smoothly, but also to the standards that will be required post-listing.

The responsibility for ensuring that boards are meeting the requirements of their enlarged shareholder base invariably rests with the board of directors itself.

Best practices

Having worked with hundreds of boards of listed organisations of all shapes and sizes, here is some advice on how boards can achieve best practices and be accountable, not only to the scrutiny of external advisors, but also to a much broader base of shareholders that is likely to arise from the flotation.

"Some executive directors can view board meetings as little more than 'reporting shops'"

We know from feedback that some executive directors can view board meetings as little more than 'reporting shops', but there are measures to prevent meetings from being long, boring box-ticking exercises.

Good planning is key to successful board meetings. If meetings are well planned in advance, with considered agendas that devote enough time to strategic planning, they can be interesting, creative and intellectually stimulating.

Preparing board agendas is a balancing act, ensuring areas such as governance and risk assessment are duly addressed, but not to the detriment of everything else.

Starting to talk

To assist directors with the conversations that will help the board stay focused, we have devised a 'six conversation' model which can be a useful starting point in thinking about agendas for boardroom meetings.   

By asking the questions in the model, directors can achieve the right balance that enables them to think more broadly about marketplaces, competitors and strategy. Remember, directors have a dual role made up of supervision (monitoring) and stewardship (guiding, advising and planning next steps).

Bear in mind also that as a quoted company reviewing past performance and making strategic decisions needs to be in the interest of all stakeholders, not just the new shareholders that arrived with the float.

Small investor interest

Looking after the interests of the big, powerful institutional investors that are now on the shareholder register is necessary.

However, this must not be at the expense of other shareholders, particularly small retail investors, or the early shareholders who backed the firm when it first got off the ground. Nor should it be to the detriment of staff or the wider community in which the company operates.

By focusing on directors' duties, we can determine which information and reports should be brought to the board meeting, and crucially which ones should be ruled out, because it is important to prevent the build-up of unwieldy board packs with too many items, or reports that are too long or poorly summarised.

Recent research by Board Intelligence and Cambridge Judge Business School found that it takes a director of a quoted company roughly a working day to read everything in a standard size board pack.

"The best CEO's reports are a short summary of what is on the CEO's mind"

To lighten this burden, the best board packs contain the most relevant materials and a few key ingredients, starting with a CEO narrative. The best CEO's reports are a short summary of what is on the CEO's mind, and should support and frame the directors' discussion.

A single-page dashboard is also vital to give an overview of the business's health, covering all the value drivers, financial and non-financial. The dashboard should be balanced and include strategy, performance and governance key performance indicators.

Of course there should be a formal finance report, but there should also be a broader performance report that drills into the real drivers of the business, including customers.

Beyond the performance update papers, there will be the meaty decision papers which should appear as high up the agenda as possible, so the board reaches them when its members are still at their freshest and have the most energy.

To improve efficiency and to standardise information, we recommend templates for these papers to ensure consistent high quality, no matter where in the organisation the papers originate from.

Future-proofed boards

In the 21st century, well-run boards take into account the scope of information and the content quality, but they also employ modern IT to automate the board pack production process and ensure that confidential information is kept that way.

Automation ensures senior management stay focused on the business, rather than rushing around to find data points and chasing last-minute submissions. And secure, dedicated apps for board members enable the board to access and comment on their most confidential information in the knowledge that it is not being put at risk.

Achieving best practice should not be confined to the boardroom. Good governance should be at the heart of the whole company, not just an activity for the board. The listed environment requires a new level of transparency, but for many groups this will be how its management team has worked for years.

Although newly-listed companies face what can seem like an onslaught of new rules and regulations, a disciplined senior team can overcome these difficulties through a shared commitment to best practice and a boardroom culture which sets the tone for the entire organisation.

Pippa Begg is Co-chief Executive of Board Intelligence

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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