Preparing for an initial public offering (IPO) has never been easy. The stakes are enormous, and the process requires significant investments in time and resources.
But in recent years, the path to a successful IPO has become even more complex. The financial community, investors and other stakeholders no longer rely solely on financial metrics and market potential to determine the viability of a potential IPO. Increasingly, a company’s commitment to operating in a responsible and sustainable manner is just as important to its attractiveness as and engine of profit and growth.
This movement is called stakeholder capitalism — the belief that companies should meet the needs of all stakeholders, rather than just shareholders. The underlying premise is that companies that prioritize environmental, social and governance (ESG) matters along with financial strength deliver improved value over time.
The responsibility for developing ESG objectives prior to the IPO and managing implementation, measurement and reporting thereafter falls on senior leadership. But the board should take an active role by asking the right questions and setting the expectation that ESG is a critical piece of the company’s go-to-market strategy.
Five key questions
To help your company’s leadership team properly embed ESG principles and plans into their pre- and post-IPO strategies, board members should be asking the following five questions:
1. What is the company’s overarching purpose and how does that link to long-term value creation?
Board members should set the expectation that senior leaders develop and adopt a strategic purpose that goes beyond “making money.” A purpose-led strategy is one that outlines how the company interacts with and benefits all stakeholders.
Companies with a purpose-led strategy typically have ESG principles embedded into both their long-term view and day-to-day decision-making.
2. What are the primary ESG issues we should consider?
It’s important to identify all relevant areas where ESG principles might intersect with business activities. For example:
- Do you know everything you need to know about how and where your raw materials or product components are sourced?
- Do you have diversity and inclusion objectives and processes for hiring/retaining employees and vendor selection? Do you measure your progress over time?
- Are you implementing sustainability enhancements across your operation?
- Do you have a proper board structure, including board members with a diverse range of backgrounds and viewpoints? This is more than an expectation. For example, the Nasdaq’s Board Diversity Rule, which was recently approved by the U.S. Securities and Exchange Commission, encourages a minimum board diversity objective and requires companies to disclose board-level diversity statistics.
3. Do we understand how our stakeholders view ESG?
Determining who your stakeholder group is, including the investors you want to attract, can help guide which elements of ESG the company should focus on first. What does your investor profile look like, and what ESG data and disclosures do those investors find most useful?
4. How will ESG be measured and monitored over time?
Board members must hold senior leaders accountable for developing plans, metrics and timelines for improving ESG performance. ESG metrics should be included in executive performance reviews.
5. How will we demonstrate our ESG performance?
Once the IPO process is complete, stakeholders will be watching to see how the company performs on its ESG commitments. Boards should outline their expectations for ESG reporting — both internally and externally.
Maximizing the ESG opportunity
Board members can help their leadership teams by striving to ensure that ESG principles are considered throughout the IPO planning process and that appropriate plans and structures are put into place prior to going public.
The payoffs can be considerable. Assets invested in ESG funds are expanding rapidly, and companies aligned to delivering long-term value enjoy lower costs of capital, higher stock valuations and new growth opportunities. Board members have an opportunity — if not the obligation — to optimize these changes for long-term success through ESG.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.
March 23, 2022 at 03:24PM