How to ensure remuneration policy and governance framework remain fit-for-purpose post-IPO

We were delighted to have been invited by the London Stock Exchange to join the panel for a webinar on 15 June, on the impact of an IPO on remuneration and governance.

Last year, there were 45 IPOs in the UK; 33 on the main market (a fall of about 43% from 2021) and 12 on AIM (a decline of about 82% from 2021). Of the 33 main market listings, only two were of what might be termed mainstream operating companies. The remaining 31 were SPACs, special purpose acquisition companies, established for the sole purpose of raising funds for acquisitions.

Declining numbers of IPOs are not, however, an exclusively UK phenomenon. Recent research indicates that in the US there were 181 IPOs in 2022 down from 1,035 in 2021, a reduction of about 82.5%.

Nonetheless, the decline in the number of London listings is concerning. The London Stock Exchange and regulators are taking steps to stem the tide. It has been suggested that executive pay should be increased to raise London’s attractiveness as the IPO venue of choice. Whilst it may be a factor, executive pay is not likely to be key to decisions about where to float a business. Several other factors will have greater significance.

An IPO is exciting. It could take 6 to 12 months and brings about major changes, some expected, some which may not be expected. Post-IPO, the business and its remuneration policy will be subject to greater public scrutiny and regulation.

The pre-IPO period is an opportunity, probably the last opportunity, to review current remuneration policy and practice, without additional restrictions, to ensure it will be fit for purpose in the post-IPO period. It should be used to review current policy and prepare the post-IPO story. Some things to take account of include:

• Will the IPO cause existing incentive awards to vest? Understand the process and how long it will take.
• Will there be time (and will it be appropriate) to make additional pre-IPO awards before pay becomes subject to closer scrutiny and regulation and current rules expire? Equity dilution limits may apply post-IPO, so this could be important if there are to be management changes on IPO and a new management team is to be installed. It may be worth noting that NEDs may not be able to participate in performance-related or share-based incentives post-IPO.
• Are any elements of current policy to be discarded, e.g., long notice periods, or potential new policy elements to be adopted, e.g., share-based incentives, if not already in place? Who will be eligible – just executives or a wider class? Understand the available share plan structures to enable informed decisions.
• If there is a strategy change, will incentive plan performance measures and targets require amendment?
• Incentive plan rules might need supplementing with provisions expected of listed companies, e.g., malus and claw back.
• Will the composition of the board/remuneration committee need to change to provide the skills and experience necessary to operate successfully post-IPO and comply with corporate governance codes (e.g., re engagement with shareholders and other stakeholders) and meet the reporting disclosure requirements of a listed company?

The UK operates a principles-based governance regime. The underlying principle is “comply or explain.” This is important as it enables companies to adopt the right approach for their business, subject to consultation with their shareholders and other stakeholders. So, using the pre-IPO period to get the post-IPO story straight will be time well-spent.

There are two principal governance codes in the UK, the UK Corporate Governance Code (UKCGC) for premium listed companies and the Quoted Companies Alliance (QCA) Code and Remuneration Committee Guidance for SMEs and AIM, which may adopt the UKCGC if they wish. The UKCGC represents a higher level of regulation, requires more detailed disclosures and is more prescriptive than the QCA Code, which has been adopted by more than 80% of AIM companies.

Increasing levels of regulation can appear daunting. That said, compliance and disclosure requirements are largely determined by the market (main market or AIM) on which shares are traded and the applicable corporate governance code. Both the UKCGC and the QCA Code have evolved to address regulatory requirements relevant to their intended users. Both are continuing to evolve and are subject to review and consultation this year. The objective is to make things more straightforward, with a focus on proportionality so as not to over-burden smaller companies, which have fewer in-house resources. An emphasis on the importance of shareholder and wider stakeholder engagement is common to both codes.

Revised codes will be published later this year. We are expecting materiality and proportionality to be themes underpinning the type and nature of disclosures companies will be required to make. We are also expecting corporate governance principles to encourage companies to disclose the outcomes of their policies (i.e., what they have achieved) and not what they are planning to achieve.

In the run-up to IPO, remuneration can be pushed down the list of priorities. For companies planning an IPO, MM&K provides the advice and support needed to ensure that remuneration and governance remain in focus, both in respect of existing policies and any changes that may be needed to ensure remuneration policies and governance frameworks continue to be fit-for-purpose in the post-IPO era.

Please contact Paul Norris if there is anything about this article you would like to discuss.

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