March 15, 2022
More companies than ever are making the move to go public, with 2021 setting an all-time record for initial public offerings and more than doubling that of 2020, which was also a record-setting year for IPOs at the time. With that increase comes more leadership teams who must shift their mindsets to meet expectations for publicly traded companies, which are dramatically different from privately-owned or venture-backed businesses.
Public companies are not only subject to board inspection but also to the scrutiny of public markets. With that scrutiny comes a much wider—and brighter—spotlight on company behavior and management practices. While this attention historically focused almost exclusively on corporate governance, there is now heightened attention on environmental and social practices as well. Essentially, all three components contribute to an organization’s ESG reputation.
When you consider boards, investors, employees, customers and the public at large, there are more stakeholders than ever who will hold businesses accountable. And they’ll do so not only for business decisions (governance) but also for operations contributing to climate change (environmental) and the impact a business has on people and their communities (social).
Different groups all have different reasons for caring about a company’s ESG metrics and impact, but as leading private companies consider becoming a public entity, they should not be—and can’t afford to be—surprised by the intense ESG interest coming from the financial community.
What steps should any leader considering an IPO take? As the CEO of a risk-management company that specializes in ESG compliance, I have a few suggestions:
Practice financial reporting as if your company is already public. This is table stakes, of course. Practicing financial reporting not only helps get the right systems in place and operating smoothly, but it can also help identify any shortcomings or red flags that would create issues once public. Address those issues sooner rather than later.
Consider ESG part of your organization’s enterprisewide risk and compliance strategy. Companies looking to IPO should count ESG risk among their most pressing business risks. You can let your chief compliance officer take the lead of these ESG programs. In my experience, this is usually a natural fit because compliance leaders are already involved with the social and governance aspects of ESG, and they engage with stakeholders across the company to ensure compliance and report on risks.
Develop ESG strategies and reporting metrics and demonstrate progress to earn credibility. Include traditional elements of governance—like financial reporting and auditing, regulatory compliance, and risk management—as well as more emerging elements that have gained stakeholder attention. Consider your organization’s approach to:
• Diversity, equity and inclusion.
• Measuring your carbon footprint.
• Employee health and safety, as well as employee engagement more broadly.
• Responsible supply chain management and sourcing.
• Whistleblower policies.
Set goals now. By getting a baseline of where your organization stands now on at least a few important ESG metrics, you can set goals that are both relevant and accretive to the value of your business. This means you can begin to make progress toward those goals in the lead-up to IPO, thus showing stakeholders the organization is committed.
The investor focus on ESG also means capital is flowing in the direction of companies that prioritize ESG metrics and report externally on their progress. Leaders should certainly consider that a strong ESG showing can aid their company in attracting capital pre-IPO.
By getting the “ESG house” in order pre-IPO, leaders will be ready for the microscope they’ll be under once public.