The survey identified scrutiny and share price volatility as the top concerns for companies preparing to list. Is that a surprise for you and what should companies do to ensure that they are dealing with those concerns?
Herb Kozlov: No surprises here. Scrutiny as a public company is certainly different from remaining private, and that is to some extent the price you pay when you decide to accept the many advantages that flow from accessing the public markets. Planning and preparation is the key. You should not initiate an IPO process without understanding the extent to which there will be added transparency. We guide companies to help make sure that they are IPO-ready from a governance perspective, that they have properly internally vetted their staff, officers and directors.
Scrutiny is another way of saying disclosure. Once they understand that, they say "OK we can live with that", or they say "you know what, that's too much information to have to disclose." We usually can manage in a fully compliant way the ongoing disclosures that a company will need to make if it is publicly traded. But you have to understand that customers and competitors inevitably will know more about you if you go public than if you remain private. They will certainly be able to gauge your overall profitability.
As for the share price, there's always going to be volatility because markets move, but strong companies suffer less or indeed benefit from volatility and improving valuations. Volatility ought not to be a major concern, especially for companies that can take a longer term view and a strategy that goes beyond quarter-to-quarter reporting.
What about shareholder pressure, the potential for activism and activist shareholders?
HK: Shareholder activism is here to stay. However, if companies set up good governance practices in the beginning, it gives activist shareholders less to complain about and less reason to lobby. Some increased shareholder activism is triggered by reluctance to adopt more modern corporate governance practices. And of course, the key driver here is often underperformance. Activists often rally around weak returns on invested capital.
There are legitimate governance tools that boards can adopt to help when faced with inappropriate efforts to include shareholder proposals in the proxy or to change compositions of boards of directors.
What are the common causes for shareholder litigation, and how do you manage the risk of this?
HK: The management of litigation risk is not mysterious. It starts with paying close attention to corporate governance and setting the right ‘tone at the top’. Having a good understanding of what your obligations are as a public company, having programmes to keep your board members and your executive officers and the rest of your staff well-informed, and frequently reminded of their obligations as a public company is really important.
The disclosure rules are really not overly complicated. And making sure that the senior management understands those rules – it's not difficult but having the right advisors in place helps people mitigate the risk.
The litigation risk goes up when there is an accounting problem which triggers a restatement, and when a going private transaction is announced. These types of events draw the attention of the plaintiff’s bar, and many companies consider the risk of such claims as a cost of doing business. And of course, with the availability of D&O insurance, the true risk of shareholder claims diminishes significantly.