By Jackson Eisenpresser and Dana Hollinger
You know the story: the big buildup, the dramatic announcement and the colossal meltdown.
So, what has to change in the IPO market in the wake of this all too frequently repeated drama?
First, corporate leadership must establish a clear path to profitability. Next, corporate leadership must insure an efficient, effective and independent governance process.
And finally, there must exist a commitment to environmental sustainability and social responsibility.
A clear path to profitability. We recognize and acknowledge that the burn rate for start-up companies is high and they are typically unprofitable in their early stages. In the venture world, investors are investing in business models that take longer to reach fruition. There must be a path to profitability in sales or revenue to meet expenses and fund growth. John Anderson was an American billionaire businessman and the president and owner of Topa Equities, Ltd, whose vision and leadership offers a sketch of what a clear path to leadership looks like. Anderson oversaw over 40 wholly owned subsidiaries in agriculture, automotive dealerships, insurance, real estate, oil, and wholesale beverage distribution.
Anderson’s mantra: Everything you invest in must be profitable …
By way of further example; Levi Strauss topped original expectations of their 2019 initial public offering price of $14-$16 share to $17 share as of the market close of 01/15/2020 it’s trading at $19.07. The reason? Profitability. For the first quarter LEVI reported earnings per share of .37 cents on revenue of $1.44 billion. The stock was up over 25% year. What drives real value? A clear path to profitability, leadership, stewardship and effective management. Chip Berge, the LEVI CEO who turned around the 166 year old brand, reinvigorated sales, added partnerships with hip brands, and focused more on female consumers. He took over in 2011 and has overseen a growth in annual revenue of $5.6 billion up 13 percent from the year before.
Corporate leadership and governance. At least two-thirds of high performing boards must be composed of Directors who are independent of management. A good director must also have relevant expertise. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. John Anderson always viewed the problem with public companies is their fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the expense of long term value creation. In 2013, McKinsey and the Canada Pension Plan Investment Board (CPPIB) conducted a McKinsey global survey of over 1,000 board members and C-Suite executives to gauge their long-term approach in managing their companies. One of the startling facts that came out of that survey is that 79% felt pressured to demonstrate strong financial performance over a period of just two years or less. We do not want to use financial engineering and cost cutting to create artificial short term value. Long term capital and value creation generates returns through good governance and effective operation. What follows are new jobs and ROI for investors.
More on governance — Great boards go beyond the basics — they provide stewardship. Stewardship is about fulfilling the board’s responsibility to growing entrusted assets so they will be handed over to the next generation of board members and executives in better shape. It’s built on internal relationships and close partnerships with management and employees. There must be an accountable separation that allows for early identification of problems and a participation in their solutions. This does not mean micromanagement. We believe the idea of stewardship is especially important for companies headed towards an IPO. Board diversity is not a risk but an opportunity that enhances long term value creation by eliminating the risk of “group think.” Wall Street rewards governance and profitability not megalomaniacs. Compensation packages should align with long term business strategies. They should not be short sighted to hurt future performance. We must look at what metrics have been put in place to drive behavior when no one is looking.
A commitment to the sustainability of the environment and social responsibility. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Are we easy to do business with? Do our employees value working here?
So, what has to change in the IPO market? Companies going through this process must demonstrate a clear path to profitability. They must show a commitment to efficient, effective and independent governance and sustainability of the environment and social responsibility. Doing these things are the fundamentals in creating long term value for current and future shareowners.
Dana Hollinger is a Managing Director of ABG Advisory and previously served on the CalPERS board, ICGN board, and the Women’s Leadership Board to the John F. Kennedy School of Government at Harvard.
Jackson Eisenpresser is CEO of ABG Advisory and previously served as Director of Principal and Advisory Strategies at Tony Blair Associates.
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