Diving into the fish bowl

Carlos Gil outlines the challenges of embracing a different board culture when a private company is listed on the stock exchange.

Becoming a public company is one of the most important strategic decisions a private enterprise will ever make. Crossing the Rubicon to public company status opens up a world of opportunities, including access to new capital markets, pools of management talent and brand recognition.

These attainable benefits must be consistent with a planned and staged strategic purpose for the company.

While most boards might consider that governance structures should be a core issue to reinforce before listing, the reality is that this is merely a prerequisite. The largest challenge that a board faces is truly embracing the public company status. Public listing requires the company to remove veils of secrecy around its business and financials. The company must openly engage with its newly expanded list of investors, some of whom will be sophisticated and professional institutional investors. Boards that embrace that level of engagement will find that capital markets and professional investors place great significance on open dialogue. The professional investor wants to see accountability from the board and management.

Companies and boards that quickly excel in the public company arena have done their hard yards before they become public. Not only do they have governance structures in place, such as ensuring the board includes independent directors with relevant industry skill sets, but also actively prepare their board members for the transition with appropriate industry courses. More importantly, the boards have cemented a culture that understands the significance of investor relations, the importance of continuous disclosure and the composition and content required in all communications with shareholders. 

Good boards understand that the Australian Securities Exchange (ASX) places them in a fish bowl, but also opens them to much competitive comparison.
The modern Australian standards for reporting and engagement of public companies are high, even for very small listed public companies. It is perhaps even more important for smaller companies to grasp the principles involved, given that many have become publicly listed as an expansionary avenue and to access  further capital.

Institutional investors actively gauge reporting and disclosure standards at publicly listed companies and those companies that have poor disclosure practices are likely to be penalised.

At Microequities, a value investor specialised in Australian microcaps, we compute a fundamental-based “Beta” for the calculation of the cost of equity for a potential investee company. In that Beta computation, one of the input metrics is the quality of a company’s disclosure practices.

Poor disclosure means we assign a higher Beta and hence higher cost of equity for the company – that is, a higher level of risk.

Opaqueness and insularity are not desired qualities for a public company. Good boards will thus embrace the accountability, discipline, scrutiny and disclosure requirements of public company life, realising that this provides a positive feedback loop. The markets will price openness and disclosure with the positive recognition it duly deserves.