Episode 7 - Understanding IPO governance

In this podcast Kerry Round, Founding Director of Round Governance Services, outlines how the governance of a company will change following an Initial Public Offering (IPO).

In this podcast Kerry Round, Founding Director of Round Governance Services, outlines how the governance of a company will change following an Initial Public Offering (IPO). She covers board structure, responsibilities, composition, and the need for board diversity. The discussion outlines how an IPO will affect important stakeholders such as employees, the policies the company will need to have in place, what disclosures will be required, and which external bodies the company secretary or governance professional will find themselves dealing with on a regular basis. Kerry describes an IPO as a career highlight and the role of the company secretary or governance professional in a listed company as fabulous.


RJ: In this podcast, I'm talking to Kerry Round, Founding Director of Round Governance Services, about Initial Public Offering (IPO) governance. Kerry, could you briefly introduce yourself and give our listeners an initial overview of today's topic?

KR: Yes, of course, thank you, and lovely to speak to you today. As you say, I'm Kerry Round, I founded Round Governance Services about four years ago.

When I was approached to do this podcast with you, I thought of some of the questions I've been getting lately from clients and prospective clients. That's those that are thinking about IPO or are some way on their journey [towards an] IPO. So, I thought it'd be useful today to cover some of the key questions that I get relating to IPO governance and changes that boards of directors and employees might face.

RJ: Thank you for that introduction, Kerry, that's really useful. To start off, a question that you might have from a client: is it necessary to change the current board structure that a company might have when you're going into an IPO?

KR: It depends on the issue in question, but very fair question. Typically, it'll be things around strategy. Another area is risk, the way in which they address risk. Another one will be the degree to which the board remains at arm's length from the executive. We talk about ‘noses in and fingers out.’ To what extent are they [the board] empowering the executive to do their job? Or are they getting in the way? Or are they forced to get in the way because the executive are not performing? It can be coming from either side.

Another [factor] might be around financials in terms of financial sustainability, around sales, product development, sales and marketing. There are a lot of areas that we see, another one typically is governance can often be a problem. The other areas around compliance. It's what aspect of the business could possibly be impacted by something that is not working.

RJ: In terms of the role the company secretary can play in identifying these aspects that are affecting the performance of the board, how can the company secretary become the most effective that they can be?

KR: I'd say almost certainly yes to that one. The UK Corporate Governance Code, which is the governance standard to which all companies admitted to the London Stock Exchange must comply, or adopt a comply or explain approach, is pretty prescriptive on what it expects from a board of directors and its committees. To this end, all companies aiming for admission will have to look really introspectively at its structure, to ensure that it's elevated to meet the expected standards. That's not to say that we need to ruffle lots of feathers and upset lots of current board directors. But we really do need to think about a number of things, including the balance of executive and non-executive directors, including specific roles and responsibilities. Of course, a big issue at the moment, and I suspect it might be a question later on, is diversity. Boards are having to really scrutinise [their] composition on diversity, both in [terms of] those protected characteristics of gender and ethnicity but also the wider cognitive diversity elements [of] background, skills, [and] experience.

RJ: In this context, is diversity more of a must-have than something that's nice to have?

KR: Yes, absolutely. We're seeing people such as institutional investors saying to listed companies, ‘if you do not improve your diversity on your boards, then we will recommend to our members that they vote against you at certain resolutions at the AGM.’ We are seeing the former Hampton-Alexander review, the FTSE women leaders review, talking about gender and putting [forward] quotas for gender, which I've always been against. As a young woman, I was always against quotas, but now I really see that until having women on boards in equal numbers is normal, then I think unfortunately we need those quotas. And the same with ethnicity representation, for which we've got the Parker review.

The Listing Rules have also just changed to make it a requirement for companies listed on the stock exchange to comply or explain with their diversity quotas. It won't be a topic that companies can choose to ignore now in their annual report and accounts. If they are not reaching, meeting, talking about their diversity on their boards, they're going to have to explain why not.

RJ: Okay, so that's definitely something to bear in mind when thinking about an IPO.

KR: I think it's really important when boards are looking at their diversity to really look at their stakeholders, to look at, who are their stakeholders? What are they interested in? What is the company trying to achieve? Is the board reflective of those stakeholders and those stakeholders’ interests? Do they have the skills and experience on the board that they need in order to ensure the long-term sustainable success of the company?

In doing so, if [this involves] going out to recruit a new non-executive director, is it automatically going to go to the locker-room tactics of appointing their white male friend that they play golf with? Or actually, are they going to widen the net so the widest possible selection of people can be considered when filling that gap on the board? It's twofold: it's not just about putting females or putting people of ethnic minorities on the board. It's about making sure that they've got the relevant skills and experience and are also covering those protected characteristics.

RJ: Yes, absolutely. Thinking about board composition in this context, if a company already has an executive chair, a CEO, a chief financial officer (CFO), and they want to keep them, will this cause any problems?

KR: Okay, good question. That's great news if you've got a CEO and a CFO. Executive directors are generally responsible for the management of the company, for day-to-day responsibilities, for implementing the decisions of the board. Executive directors are employees of the company and as such have a contract of employment. By nature, they are not independent.

In the scenario that you've mentioned, you've talked about an executive chair. That's something that's going to have to be handled carefully and thought about deeply, because the [UK Corporate Governance] Code tells us that a chair should be independent on appointment. The chair will also be a non-executive director, so they will not be an employee of the company. Non-executive directors are instead engaged under letters of appointment.

If you're thinking about IPO, you really might have to think about who within the organisation is going to handle those difficult, sensitive subjects. That's not to say there's not a place around the board table for the current executive chair, but the current executive chair should not hold the title of chair upon day one of admission [to the stock exchange].

RJ: Okay. I believe that's something that investors are quite keen on as well, maintaining that independence of the chair.

KR: Yes, absolutely. Chairs, of course, are only independent upon appointment. After that point of time, they no longer count in the independence ratios on your board of directors. So, it can get a little bit confusing.

RJ: After an IPO, it sounds like the boardroom is a bit different. Is it business as usual, or what else is different in the boardroom?

KR: That's really interesting, because we need to remember that first and foremost, the company has probably gone to IPO because it's got ambitions for continued success. It's already got a proven business model that's made it successful to the extent that it's got to that point, and those senior managers, those executive directors that have got that organisation there, are to be commended.

But there will be some things that will have to change, and disclosure is a big one of those. Having those disclosure requirements clearly articulated in the early stages, so that there are no surprises for a board, [will help.] When I to refer to Section 172(1) statement now, which is Section 172(1) of the Companies Act 2006, which in itself has not changed since 2006. There has always been the requirement to consider all stakeholders when making board decisions which impact them. What has been different in more recent years is the requirement to disclose on those Section 172 duties in your annual report and accounts. That's something that companies are starting to get right but are still not quite there.

We're expecting boards to talk about how they have made decisions in the boardroom that affect stakeholders. But we're [also] expecting them to disclose information on the pros and cons. Balancing out the needs of stakeholders: have they changed a board decision because of how it might affect a stakeholder group? Have they not done something because it might affect a stakeholder group? Or have they done something even though [they] know it might negatively affect a stakeholder group, if it might positively affect another group and be beneficial for the company in the long term? There's a lot of details that will have to be disclosed in the report and accounts that a non-listed board might not quite be used to doing so.

Another thing that might change in the boardroom: some large private companies absolutely have non- executive directors on their board. And, whilst they're not listed, they still like to reflect the structure of a listed board. For them, they might not find that there's too much of a change around the board table. For others who might suddenly find themselves with non-executive directors on the board, with lots of new faces, new roles, with new divisions of responsibilities, that might take a little bit of settling into. In my opinion, it's a good chair that will be able to identify whether all of the board members are comfortable, whether all of the board members are being given an opportunity to speak.

I think the role of the non-executive director is increasing in its value year on year and their role to really constructively challenge, I'm seeing that happening, more and more. I think sometimes the executive directors can feel a little bit like it's ‘them and us.’ And actually, it's a board that works together that can see the value of all of the individual roles on the board.

RJ: Yes, absolutely. You mentioned stakeholders. How would an IPO affect employees, who are quite a large stakeholder for a company?

KR: Positively, I hope. There's no getting away from the fact that for a core group of employees, they are going to be living and breathing the IPO for weeks, months, if not years. And this is all done alongside their day job. How will they be affected? There's going to be a lot of work, no two ways around it. But I'd like to think that once the company was listed, this is where share plans can come into their own, that there will be remuneration benefits to employees. I'd like to think that there will be an expansion of opportunities for current employees who might wish to move upwards, sideways into a different role, they might find that they've got more opportunities within a larger listed environment.

One thing I think that's subtly changed in recent times is the Code requirement to have specific methods of board engagement. This is no longer saying that the group values the culture of a company, but the board must value the culture of a company. The board themselves must engage with the workforce. For me, that's not rocket science; that should be done as standard. But for those that are actually being nudged into making sure that that happens, I'd like to think that there's a lot of two-way benefits for the employees to get to know the board, for the board to get to know the employees. My view is that happier employees are more productive employees. I think that's a really positive change of the Code and a positive effect for employees.

RJ: Yes, absolutely, it definitely sounds to be that. If a company has a corporate website, is that something that they'll need to change after an IPO? Or is that not affected?

KR: There are lots of disclosure requirements for the website. I think everybody's familiar with [the requirement that the] modern slavery statement must be one click from the homepage on your corporate website, and large private companies will have to have that anyway, so hopefully that would be in place. But there's lots of other things on a listed-company corporate website that never before would companies have had to have disclose. There needs to be links with the share price, for example. There needs to be links with the RNS newswire system, and that's an external relationship that the company might not have worked with before. The Financial Reporting Council’s Guidance on Board Effectiveness tells us that we should be putting the role descriptions for the chair, the CEO, matters reserved for the board and senior independent director on the corporate website. We need to have our annual returns on the corporate website and there needs to be an archive of all of the AGM materials. So, there's a lot of change.

For my mind, there's two things there. There's, what do we need to disclose? And who's going to be responsible for the corporate website? Where in the organisation is this going to land? That's often a difficult one. I think most of your audience will be company secretaries, [who will understand the reality that] if we don't know where the job goes, it goes to the company secretary. So that's something that I really think needs to be addressed early doors to make sure that you've got the right resources in place. The important thing is that the disclosures are there, and that the company is compliant.

RJ: Thinking about the sorts of policies that you'd need to have available on a website or in other forums. If a company's lawyers have already set out all of those policies, including, for example, whistleblowing, is there anything else that the company needs to do? Or have they got it all covered already?

KR: It would be great if they did. In order to attain admission [to the stock exchange], the company will have to demonstrate that it's got a certain number of key policies [in place]. I’m not talking about all of your employee-related policies that genuinely come under a HR banner, I'm talking about board policies, and whistleblowing is one of them, anti-bribery and corruption, etc.

It would be great if just having the policy was enough, but actually, we need to break whistleblowing down. Let's take that as an example. We need to break it down. If an employee submits a whistleblowing report, firstly, they need to know how they're going to do that. The Code says that they have to have a way of making a whistleblowing report anonymously. [The] question is, how are we going to do that? So straightaway, we've got some ‘how’s’, we've got some, ‘how is this going to be embedded?’ Again, I come back to [the question of], who is going to take responsibility for this? Are you going to use an external resource to allow you to [facilitate] the anonymous route of making a whistleblowing report? Then let's think about the nature of the whistleblowing report. There are a number of factors that qualify [a report] as being a whistleblowing report, [for example] if it is of public interest. For example, let's take a really wild extreme, if you work for a food manufacturing organisation, and you – the employee – have witnessed somebody putting something bad inside some food, then we've also got criminal repercussions, food standards [to take into account], so the company needs to know exactly who they need to report all of these things to as soon as possible. Let's just say this report came in at seven o'clock on a Friday evening and everybody's gone home. And the inbox that monitors those whistleblowing reports is left ignored, so that food has gone out over the weekend, can you see the catalogue of errors that could have happened? Now I'm absolutely talking in the extreme and my imagination is going wild, but you can see the point that I’m trying to make. So yes, having the policies is one thing, knowing how you're going to embed them, and I come back to knowing who's going to be responsible for them, is key for me.

RJ: Absolutely. And what about the MAR handbook? If a company has that, do they need anything more?

KR: Absolutely. And the same principle [applies] and MAR’s a really complicated one covering such a wide range of activities, relating both to the board, PDMRs, their connected persons, and anyone within the organisation who might have access to potentially price-sensitive information. The number of stakeholders [is] high, the implications are high. Nobody wants to get a visit from the Financial Conduct Authority for getting that wrong. Having the handbook is one thing, knowing the handbook inside and out, having it embedded within your organisation, having all of the key internal stakeholders knowing what their responsibilities are, and when, that truly is key.

I think any organisation needs to have two people as an absolute minimum that understand all of the intricacies so that there's a deputy if somebody's not there. Again, having the handbook is great, but knowing what to do with it is even more important.

RJ: Okay, that's really useful to know. You mentioned earlier about investor relations teams. If you have an internal investor relations team, do you need a specialist on top of that? Or have you got that covered?

KR: No. If you've got an internal investor relations team, then that's fabulous. I think oftentimes companies that are going through listing do not have one and feel that they can handle the remit of the investor relations [team] themselves internally, and that's admirable, and I think most people that take up that mantle are competent to do so. But I would stress that there's a lot of work that needs to be done alongside the day job.

When you think about key hot spot points where you’d need investor relations, such as half year-end, or full year-end results, investor roadshows. Say, for example, you're the CFO of the company, so you're already absolutely tied up in doing all of the financials of the year end, having to do the investor relations on top of that day job is a significant amount of work.

I come from [the perspective of] my career, I think we didn't really have investor relations when I started 20 years ago, I certainly wasn't really familiar with them. But now I can really identify investor relations as being a valuable part of a listed company’s team. That's not to say you need to go out and hire expensive investor relations companies. I would say use more consultants because that's what I am! But, there are small consultants that are there to help you whilst you find your feet, and then you might find actually employing somebody full time is a more cost efficient way [to approach investor relations].

I think the thing with a lot of company secretarial matters [is], it's very cyclical. Whilst you might look at the first 12 months ahead of you absolutely in shock and horror as one thing after another unfolds itself to you. Actually, once you've done the first year, the second year will be very similar to the first year. You've got the structure in place, the flesh around it will change, but the structure is in place, and I'd like to think that that's a comforting thought for anybody going through their first 12 months post IPO.

RJ: Talking about things that happen on a regular basis. The annual general meeting, if a company already has experience of holding those meetings, is there anything different that they need to do after an IPO?

KR: Yeah, and I always say that AGMs in a listed company are a bit like eating crab: maximum effort and minimum pleasure. [There’s] an awful lot of work behind the scenes for an AGM, you have to do so much preparation for the ‘what if’ scenario. Let's just even think of preparing the Q&As – what if a shareholder asked this question? Nine times out of 10, they won't ask any questions. For me, in my career, AGMs have been very small, low-number-of-attendee events. I think that might be changing with more hybrid AGMs that we're seeing where the opportunities for shareholders to attend is a lot higher. So that might change.

We've got things like proxy advisers; you've now got a wide number of shareholders that could be national or international. This is an opportunity for all of them to have their say. Whilst you may be used to holding an annual general meeting, your stakeholders will have increased dramatically [in number], you'll be working with external company registrars now, you’ll have to involve them at every step of the process.

We mustn't forget that when we're doing the annual report and accounts, the AGM documentation will be done alongside that so that they can go in with the same postbag. It might sometimes feel like, why are we looking at the AGM so early? Actually, it's because we've got [to manage] the practicalities of getting the AGM documentation produced and out there with the annual report and accounts. There are proxy advisers, people like ISS, PIRC, IVIS, and they all have their views as to how their members should vote. I certainly remember the panic of getting a questionnaire land when I was in-house and having 24 hours to respond and turn that around.

There is a lot more work for an AGM and you won't necessarily see it in the end product. But if you're not prepared, it's when you're not prepared for an AGM that things go wrong. So, it's always worth investing the time in it.

RJ: You mentioned proxy advisers. For companies that might not have come across them before an IPO, what are they? Who are they and what do they do?

KR: They’re institutional investor organisations [and] they do carry significant weight when it comes to directing their members on how to vote. Some of them, such as ISS, use a governance quality score to rate companies which will measure the quality of their corporate disclosures. You might have heard of ‘red tops.’ Some work slightly differently, and I won't go through them all now. People that represent, say, all the pension funds, some of them in the UK, some of them in the US, but their voice is absolutely heard by investors. We're seeing these proxy advisers reflect [in their advice on how to vote] what we're already seeing in the [UK] Corporate Governance Code.

RJ: You also mentioned registrars. What's their role, what do they do?

KR: When a company has a share register and they’re private, then it's quite easy to handle that share register. So, [knowing], who are your shareholders? When did they buy their shares? etc. That can be done in an Excel spreadsheet or on [a] company secretarial database. When you go listed, all of a sudden you have got, you might have thousands, you might only have hundreds of shareholders, and they could be all the way around the world. Essentially, the external register keeps all of that information in one place. It is responsible for things like printing out the share certificates. It is responsible for keeping all of the addresses of the shareholders.

When you're doing the report and accounts, for example, you’ll liaise with the registrars to make sure that you've got all of the correct addresses for the mailing matrix, they'll keep hold of the information of who wants hard copy, who wants soft copy. You’ll liaise with them when it comes to dividends and dividend stationery and who's on the register at the point that it's cut for people to get dividends. You might have heard of Shares Trading, Comm Div or X Div . You'll have quite a close relationship with your registrar. There are a number of external bodies that before you might not have dealt with, but all of a sudden, you'll find that you'll need to be dealing with them on a regular basis.not prepared for an AGM that things go wrong. So, it's always worth investing the time in it.

RJ: You also mentioned the report and accounts there. Is that process different post IPO?

KR: Yeah, some companies, some large private companies, already do glossy report and accounts. Some companies like their non-listed company accounts to reflect as much as possible a listed company set of accounts. We've also got the Wates Corporate Governance Principles for Large Private Companies, there's a lot more disclosure requirements in them.

However, there's no getting away from the fact that for a listed company, the list of disclosures, it's in the hundreds and the annual report and accounts is a vehicle for showing off those disclosures. I love a set of annual report and accounts. I don't see it as a marketing tool, and I know some organisations do. I see it as an opportunity to show off all the good governance that's done. Because oftentimes, I think a lot of good governance is done. It's just that the right people within the company aren't talking to the right other people to find out what is done to then put it in the report and accounts. I like uniting internal stakeholders, getting them to speak to each other, going, ‘oh, okay, so we do a lot of workforce engagement with our board, we didn't realise that we did that.’ So yeah, that process can be quite different.

It can also be quite expensive, because again, you'll have an external body generally, that helps you with your design, your project management, the production. If you think of the postage costs alone of sending the report and accounts out, as much as we'd like to see that we're moving towards electronic copies, shareholders oftentimes still prefer hard copies. I'm a bit guilty of that; I've got lots of hard copies on my desk. I just find it so handy just to reach out and grab, even though I’ve got a really high sustainability conscience and feel very guilty for having the hard copies!

RJ: Well, yes, I'm from a publishing background, so I sympathise with that: you want to go digital, but you still quite like a print copy. Taking all these factors into consideration that we've discussed, is an IPO something that you would recommend a company to consider taking on?

KR: Yeah, absolutely. I think it's a career highlight, certainly for any company secretary. I think, like building a house, if you've got your foundations right in the first place, everything else is going to be easier as you go along.

Understanding what a governance framework means, in the beginning, is really important. Understanding what your governance framework is, as a large private company, and are you already complying [with the Code] as a large private company, versus what you will need [to do] as a listed company. Understanding what that is, understanding [who] your internal stakeholders are and who will have responsibilities. Also, having a wider understanding of who your external stakeholders will be, will really set up any company secretary that's about to embark on an IPO journey in really good stead.

For me, [an IPO] is really positive, and I think, once you are in a listed company environment, for me, I think the company secretary is the most important person in the whole company. Because you really do have the weight of legislation, regulation, governance, best practice on your shoulders, you get to liaise with all of the stakeholders in the organisation, internal and external, you build really good relationships with the really senior members of the company, the executive and non-executive directors. For me, I think the role of the company secretary is a brilliant one, but the role of a company secretary in a listed company, I think is fabulous. And whilst it might take you a good holiday in the Maldives after an IPO to get over it, I think it's well worth it.

RJ: Well, that's a really positive note to end on Kerry. I think that this has been a really useful discussion to cover off those points that you might need to take into account before you embark on the journey of an IPO. Thank you very much for your expertise today, Kerry, it's been really insightful.

KR: Not at all and thank you. It's been a pleasure to talk to you today.

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