The UK stock market has seen a record-breaking number of companies launch this year. According to EY, 14 initial public offerings (IPOs) have raised £2.9bn on the main market, and a further 19 raising over £1bn through the AIM (Alternative Investment Market)—an impressive figure for an economic climate navigating a pandemic.
The cause of this surge has been attributed to several factors: companies repositioning themselves during the pandemic, bouncing back from Brexit, and the persistence of low-interest rates.
However, these are not the only reasons. Companies realise that now is the best time to plan an IPO, as future prospects are looking bright.
So should you opt for an IPO?
UK companies are now holding onto their IPO money for longer than ever before. By placing themselves in the hands of the London Stock Exchange or AIM, companies can access a range of investment opportunities to grow their business.
Despite this, there is also a great deal of risk associated with going public. As the company is now open to the scrutiny of thousands of investors, it is crucial that it does not forget its duties to its employees, customers and the environment.
A strong governance structure is essential to ensure that this risk is minimised; without it, the company could face disaster.
How can companies build strong governance?
Building strong governance before an IPO is an essential first step for young companies looking to go public. It shows investors that the directors are aware of how to run their business to protect their investment and deliver sustainable growth while avoiding any instances of non-compliance.
Directors must be aware that any former company non-compliance matters will be brought up by investors and could be used against them when making investment or valuation decisions, so there is a greater need than ever to ensure company governance is strong.
It helps if it has been shown in previous accounts that the company can stick to budgets, as this will give investors more confidence in future forecasts.
It is also important to remember that shareholders are entitled to know who they are investing in. If directors have a track record of acting irresponsibly, investors will most likely withdraw their interest. Once on the stock market, all directors will be listed, and their interests disclosed and open to scrutiny and questioning.
Investors want to ensure their investment is being managed appropriately, and for their best interests. As a result, independent directors are often key to ensuring the company’s directors continue to act in the best interests of its shareholders. The strength, experience and character of the independent directors will give investors confidence.
Suppose a company’s existing directors are running a solid business already. In that case, they should take advantage of their expertise to prepare themselves for the change from private to public ownership. Financial advisers will help with this transition. All directors must demonstrate an understanding of the company’s financials, including trading history and forecasts. This will enable them to give accurate information if requested by investors.
Directors should also be aware that their actions can significantly affect investor confidence—in particular, under-performance or irregularities in data could discourage potential new ventures. Transparency from directors is critical as investors need to have a very clear understanding of what they are investing in and how their investment will be utilised and managed. This is where the independent director’s role becomes key.
External environment
Directors also need to be aware of developments in the external environment, such as new regulations, and ensure that company policies are updated accordingly. All documents must be up to date and available during any negotiations or discussions with investors before an IPO. This ensures investors will feel confident that they know what they are getting into.
Addressing external regulatory developments openly with a clear plan of action and a timetable showing compliance ahead of the required date will show the directors prioritising such matters and indicating a strong governance environment.
The company must also respond to requests for information promptly. This doesn’t mean that they should ignore their other responsibilities. It simply means that they should make sure they are aware of new investor requirements and requests. This will help to build trust between the company and potential investors. It is essential that all stakeholders are transparent with their investors—this means making sure they have a good understanding of the business and all aspects of its performance.
Additionally, analysts and journalists should be updated with information to pass on accurate facts to investors. Companies need to ensure the risk management processes are strong enough to identify and escalate new risks or changes in risk up to the board on a timely basis. The directors are required to communicate significant events to the market much quicker as a public company.
Finally, to keep a company in good standing with both shareholders and society, the directors must be seen to be working proactively. One way to achieve this could be to bring in an expert to look at a company’s business processes and make recommendations for improvement or to achieve a high level of external accreditation. External validation of information shared by the directors is one of the strongest forms of governance.
Imran Anwar is chief financial officer at Epos Now and a former deputy group CFO at The Hut Group, where he helped drive the company through a successful IPO on the London Stock Exchange.