Assessing the Trade-Offs: Public Versus Private
The latest frenzy of going-public deal activity has quickly subsided. Over the past few years, special purpose acquisition companies (SPACs) and traditional initial public offerings (IPOs) revived interest in the public markets, and some private companies found their way onto the public stage through mergers and acquisitions. As activity slows, now is an opportune time for directors to reflect on board responsibilities when faced with a decision to remain private or go public, via any vehicle. Whether a decision was made in recent years, is being debated, or will be contemplated in the future, there are critical questions directors should ask and for the entire board to consider in order to reach an informed and sound conclusion. The prospect of increasing revenues, scaling operations, attracting diverse talent, and, ultimately, accessing capital to fuel strategic growth must be worth the trade-offs. Certainly, recent capital markets activity should have, at a minimum, sparked a conversation for every board: Could a transaction generate shareholder value?
To the greatest extent possible, it’s important to assess the current and future state of a company in advance of such a decision. For the board, trade-offs can be considered using the decision criteria outlined below.
Remember your fiduciary duties. The board’s duty of loyalty and duty of care always apply. When in the public markets, however, the environment changes, the stakes may be higher, the requirements are stricter, and there may be more scrutiny on you. Regulatory bodies, designed to protect the shareholder and provide access to information, can ultimately hold the board of directors to account, business judgement rule aside. Regardless of if the company is private or public, are you satisfying your fiduciary duties to shareholders? If the board can maintain standards in a public environment, then a deal is worth considering.
Understand how expectations of the board change. Private and public company board governance is, quite simply, different. Board operating policies and procedures need a thorough review and revisions to ensure compliance with new standards and expectations from new shareholder groups. Without the benefit of public board experience or your own advisory board, you are missing a valuable perspective. For example, in the public sphere reporting requirements increase to comply with US Securities and Exchange Commission regulations. Stakeholder groups expand, and quarterly reporting is accompanied by investor calls and analyst question-and-answer sessions with management. Debt rating agencies can shift financial performance expectations and impact stock price. Shareholder concentration and the watchful eye of the press can create significant pressures. Transparency and providing information should not be a challenge if the board is clear in its own oversight. Are your obligations and objectives clearly defined, actioned, measured, and assessed? By conducting a board governance maturity assessment, directors will have a clear view of the current state and the gap to public company expectations.
Maintain focus on the company’s strategic direction. As a board, you are tasked to oversee the strategic direction of the company and select the right CEO to deliver on these objectives for shareholders. Public markets will react to the management team as an indication of potential future performance. In addition, strategy must now also consider all stakeholders, with environmental, social, and governance (ESG) issues at the forefront of corporate responsibility. ESG is also a driver to attract critical talent and shareholders. Corporate strategy is a long-term goal. A public company board must maintain the balance between long-term value creation and the expectation for quarter-over-quarter short-term results. Will going public set corporate strategy to maximize shareholder and stakeholder value?
Protect the board from risk. Board and corporate risks can be expansive. Being informed is foundational to protect against risk. At least annually, review your board evaluations and criteria, assess your directors and officers liability insurance needs and coverage, and review succession planning for both the board and the CEO. Listen to and engage with the management team. Be prepared for macro volatility and protect from downside risk with clear planning (e.g., conduct tabletop exercises for crisis management scenarios). Are risk management policies and procedures up-to-date and enforced? Have business resiliency management plans been developed and agreed to? Is clear action being taken to proactively monitor, protect, and respond to downside risk? As a public company, risk mitigation must be managed carefully.
Follow the money. Finally, as the board assesses a transaction to go public or decides to remain private, take a close look at the terms of existing and new financing. Always keeping an eye on the balance sheet and covenants will allow you to proactively see and respond to potential issues. If the company is entering public markets, know your financing partners. Review the board and executive compensation plans with the behaviors they encourage in mind. As a public company, financing and compensation information will be filed and actively reviewed by stakeholders. Have you considered the implications of partnerships, financing, and incentives on performance?
If a board is confident that there is a path to satisfy public company requirements and being public will accelerate shareholder value, the answer to all questions above should be yes. Timing is everything with public markets and being prepared preserves optionality. Two examples: WeWork and Airbnb. WeWork was forced to abandon plans for an IPO in 2019 amid fundamental concerns about the business model and governance. It still found its way to the public markets via a SPAC in late 2021. Airbnb paused IPO plans at the beginning of the pandemic but did file in 2020 at the height of lockdown, with an overarchingly positive debut.
Making informed decisions requires asking smart questions, conducting the right analyses, and relying on subject matter experts. Seek advice and guidance early. It can be challenging for a private board to keep a clear, strategic, and pragmatic perspective during a transaction and not get caught up in the momentum.
Finally, with the reach of private equity ownership in corporate America and the same private equity funds operating as publicly traded entities themselves, a board may find the lines blurred no matter which decision is made.
Emily Harte is a partner at Oliver Wyman, a business of Marsh McLennan.
Viveka Purandare is a principal at Oliver Wyman.