26 April 2017
We may be in a period of purdah as we prepare to return to the polls, but, the Government’s Green Paper on Corporate Governance will inevitably return to the agenda as the expectations of change and focus on accountability and transparency extends now beyond the large listed companies to privately held companies and other organisations.
There is a long established understanding that the governance arrangements for new, small private companies need not be as onerous as those for our FTSE companies. However, small companies with an ambition for growth, and therefore a need to secure additional finance, by whatever means, will in time need to give proper consideration to their internal governance arrangements. Those companies who seek to achieve a successful initial public offering (IPO) are required to confirm the suitability of their governance structures. In many instances, recognition is given to the fact that such governance arrangements take time to develop and also their complexity develops as the company grows.
The challenge therefore comes when directors need to explain the arrangements in place, either by way of the narrative reporting within the annual report and accounts, or within the admission document. All too often, the quality of narrative explanation falls short or is set within a context of intent and a reliance on the phrase ‘in so far as is practical and appropriate for an entity of this size and stage of development’. Such a phrase may tick the box but will your investors fully understand what this means? If they don’t understand there is a risk that they will not be confident enough to invest.
The Quoted Companies Alliance (QCA) has a well-established Corporate Governance Code that is both principles based and aligns with the UK Corporate Governance Code whilst being practical and appropriate for those companies in that transitional growth phase. The Code recognises the challenges of the growth journey and provides a valuable source of guidance and best practice for the development of strong governance structures.
Our discussions with investors in our annual review of corporate governance behaviour has provided a consistent message: the need for trust and confidence, which is built around sound governance arrangements. Investors want to see appropriate and proportionate arrangements in place, but they also want to understand the rationale and logic for those arrangements particularly if they differ from considered best practice, hence the call within the QCA’s Code for companies to provide explanations for what they currently do and why these arrangements are considered to be in the best interests of the long-term growth of the company.
Preparations for a successful IPO involve many elements, not least the fundamental business model for the company and its plans and ambitions. However, do not underestimate the value of the governance piece that needs to run alongside. Whilst the headlines surrounding the Government’s Green Paper on the future of Corporate Governance will focus on the headline grabbing Executive Pay aspects, there is merit in other aspects of the report which looks to the engagement with shareholders and other stakeholders to secure long-term growth and opportunity for the company.
If you have a question about governance structure or anything else discussed in this blog, please contact me or your local UHY corporate finance expert. To read our latest Corporate Governance Behaviour Review, click here.