Mastering the Generation Game

Comm update_28 JanTapping into the changing needs and desires of five generations of consumers is only part of the challenge facing today’s business leaders. Just as taxing is the question of how to manage a multigenerational workforce. How exactly do you ensure that your incentives, ways of working and corporate ethos are going to appeal to both your younger and older employees?

Mark Purdy, Managing Director (Economic Research) and Chief Economist at Accenture, comments: “There’s a clear need for a multigenerational organisation. We’ve recognised that there’s a major trend around ageing and increasingly organisations are thinking about this, but maybe what we haven’t recognised is that we have a lot of millennials in the workforce too, and increasingly the successful organisations are going to be defined by their ability to bridge the gap between the ages and capitalise on the inherent strengths of both young and old.”

It’s a leadership and talent management issue. Naomi Wells, Head of Future Planning and Sustainable Development at Waitrose, part of the John Lewis Partnership, says: “We want to be able to offer a benefits package which appeals to people at the end of their career and the beginning of their career. Having choices is really important, whether that’s buying an extra week’s holiday, investing more in your pension or taking childcare vouchers, and a benefits package that covers the full spectrum of your workforce will also help you to attract talent, both young and old.”

Few of those in leadership roles will have experienced this before, especially as it is intricately linked with how technology is changing the workplace. Vanda Murray, Board Mentor and Non-executive Director at construction and support services company Carillion, says: “Businesses need to invest in IT to enable flexible working, which may be from home or any remote location, as it is now expected that we are all ‘connected’ wherever we are.

“There are huge benefits to businesses that embrace more flexible working patterns and practices. It helps recruitment and retention – in particular those workers with family commitments – be it younger children or elderly parents. Young mothers often find they cannot balance work and home life without this flexibility for example.”

Experience matters

According to research by Accenture, the fact that people are staying in employment for longer should be seen as a good thing for the economy as increasing time in the workforce by one year per person in the UK would boost the level of real GDP by one per cent. Mark says: “The fact that we’re going to have more people in their mid-sixties who still have valid skills, plenty to contribute and who also have time, is a tremendous opportunity for organisations that can harness it in the right way.”

In many cases, it’s about thinking how the older generation’s experience can be used in more imaginative ways. At Tullow Oil, for example, older workers who aren’t yet ready to retire are proving to be extremely useful when applying their experience overseas. Gordon Headley, Chief HR Officer at Tullow, explains: “In Ghana, Uganda and Kenya where our main operations are, there is an expectation from local governments that we train local workers,” he says. “By having older workers available to go and work overseas we can send seasoned and highly experienced oil-field professionals to train local workers… which [makes our older workers feel valued and] gains us great favour with those governments.”

Tim Smart, Chief Executive of the Kings College Hospital NHS Foundation Trust, has seen a similar benefit of shared knowledge: “We are doing quite a lot of work with health care systems providers in the Middle East. They really value and respect age and experience so we are able to offer people opportunities beyond their normal retirement age, working in our more commercial developments which are principally overseas.”

It’s a case of applying some imagination and creative thinking to the world of work. Anne Jaeger, Chief Risk and Compliance Officer at insurance firm RSA Scandinavia, says: “We have been able to attract people who would otherwise have retired to some senior schemes by finding ways to suit their needs, such as where they only work three days a week or part time.”

Great expectations

The under 30s generation, or so-called ‘millennials’, also want different things from an employer. “Our younger workers aren’t driven just by money,” claims Don Elgie, CEO of PR and communications concern Creston. “They’re also interested in being able to advance themselves through learning… [that’s why] we have various graduate [and] innovation schemes where we encourage people from across the group to, for example, pitch for a hypothetical client or submit an innovative idea. Actually, we’ve found they’re motivated by a whole host of non-financial incentives.”

Mark comments: “We find that a lot of the people we recruit [at Accenture] are incredibly interested in, for example, our Corporate Citizenship programme, Skills to Succeed, or the work we do for the World Economic Forum. There’s this sense that they’re interested not just in the business itself, but in its place in the wider world and the contribution that it can make to society.”

Unlocking the power of a multigenerational workforce involves encouraging the exchange of knowledge and experience between the young and old in an organisation. Jane Furniss, NED at the National Crime Agency and former CEO of the Independent Police Complaints Commission, comments: “Certainly, at the IPCC, use of social media, technology, understanding of networks and ways of operating among young people and understanding of the world, meant that many of the people that [we recruited] and the police officers who operated with us, found that shared learning was really valuable…

“The experience of one and the knowledge and understanding of the other really improved how we did our business. And it was better for the public, making sure our services were changing to the public demands.”

Rudi Kindts, Non-executive Director for technical recruiter Matchtech and former HR Director for British American Tobacco, says: “The nature of what constitutes work is changing and I see some organisations that really haven’t thought it through or are still arguing against the benefits of flexible working… [while others] are making their sales force as flexible as possible, providing them with the technology so they can be on the road, working from home or wherever.”

Increasingly, successful organisations are going to be defined by their ability to harness productivity across the workforce, combining the wisdom of age with the exuberance of youth.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

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Finding Your Voice as a NED

Comm update_15 JanWhile landing a position as a non-executive director may be difficult enough in itself, more mysterious still can be what to expect around the boardroom table in those early days. The real challenge for first-timers in the role, especially if they’ve had limited interaction with NEDs in their executive career, is in knowing how to influence other directors and when to keep opinions to themselves.

“I couldn’t have been a non-executive director earlier on in my executive career because I probably wasn’t as confident as I needed to be,” says Cath Keers, Non-executive Director at Home Retail Group. “It’s important to gain solid boardroom experience as an executive director to build your confidence before moving to a NED role, because you need to be able to challenge constructively and act independently and impartially. You should also prepare to be a lone voice around the table as, sometimes, even the other NEDs might not agree with you.”

Anthony Fry, Chairman of UK dairy foods processor Dairy Crest Group, comments: “For people who have not spent their careers in boardrooms, my advice would be: learn how to read the room. It’s not just important to be right on an issue – it’s working out how to persuade your colleagues that you are.

“It’s also critical to learn how to challenge executives in a positive but not aggressive manner – many new NEDs make the mistake of confusing the need for critical judgement and comment with negativity which can often create an ‘us and them’ atmosphere.”

Even those with a wealth of boardroom experience must learn to adapt their approach. Michael Benson, Chairman of emerging market investment management firm Ashmore Group, comments: “Having been a pretty hands-on executive director, I had to remind myself what my new role [entailed]. Remember that the role of a NED is essentially to ensure the financial well-being of the company, to be the guardian of all aspects of governance and to approve the top-line strategy and monitor its implementation.”

Use your initiative

The skills required to be successful in the role are changing which means that a lot of work has to be put in if you’re going to make the grade. According to Joelle Warren, Chairman of executive and NED recruitment specialist Warren Partners, companies are looking for “broad experience to be able to assess and comment on a full range of commercial and governance issues… [and] as far as personal qualities, we’re looking for team players with small egos; people with self-confidence and good judgement…

“The Combined Code talks about five aspects of the NED role: constructive challenge; scrutiny of performance; risk assurance; remuneration and succession planning for executive directors; and stakeholder engagement. Look for opportunities to demonstrate these in your executive role – potentially with subsidiaries or joint ventures.”

Ian Durant, Chairman of property investment and development company, Capital and Counties Properties, comments: “The role has changed over the last five years or so. There’s a bit more governance structure and technicalities required, and a greater sense that institutional investors are interested and want to be engaged with what boards do and how they go about their roles… [so] you need a softer way of delivering your challenges in order to become more effective as a NED.”

The onus is on a NED to make sure he or she is up to speed. Carl-Peter Forster, Non-executive Director at engineering concern IMI, who took on his first NED role at Rolls-Royce in 2003, says: “I was very much in listening and learning mode to begin with, although I didn’t feel uncomfortable with this because UK corporate governance is really quite complicated these days. Everybody initially has to learn a lot… so I would recommend asking for formal training sessions in all aspects of corporate governance early on – and it’s very much up to the NED to actively pursue this.”

Don’t rush it

Dedicating plenty of time to the role early on will certainly help you feel more comfortable sitting on the board. Jeremy Williams, Non-executive Chairman of Assembly Studios, an international design and digital services company, says: “My first [NED] role was as chairman for a marketing services business… [and] I devoted a lot of time to this… and as a consequence felt comfortable from the beginning. As part of my contract I made a set of recommendations to the board after the first three months and [was] influential in helping to create a full turnaround and growth plans for the business.

“It takes care, confidence and a fully immersive induction programme, looking at the major challenges, issues and functions of the business. Over six weeks I sat in on key meetings within the business, be they business development, marketing, operations or finance related… had one-to-ones with all of the key managers and held video calls with those in the international offices.”

Ian comments: “Those early months are as much about getting to know the business and feeling comfortable about your own contribution in a board situation… Take your time, observe the behaviour of other NEDs, get to know the business as well as you can and develop credibility with the management – not just the board – by getting out and about in the business and meeting people.”

Bearing in mind the higher expectations and increased scrutiny now placed on NEDs, it’s a case of taking nothing for granted and going all out to do the hard yards in those early days to make sure you’re properly informed about the business.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

 

The Mindset of the CEO in 2014

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For returning CEOs, January will be about keeping energy levels high, ensuring goals and objectives are communicated clearly and paying close attention to the balance and make-up of the senior leadership team. As the year progresses, momentum is going to be everything as there is an increasing sense that the time has come for businesses to go on the attack.

A common refrain from executives is the need to have the right people around them. Matthew Dearden, Regional President for Eastern Europe, UK & Ireland at outdoor advertising company Clear Channel, explains: “My [New Year’s] resolution is to remember that it’s not about [me], it’s about the team; ultimately, the goal is to make sure that everybody in my team is in a place where they don’t really need me.”

Marnie Millard, Group CEO of soft drinks business Nichols Plc, comments: “The main thing I’ve got to focus on now is the development of our leadership team, because I’ve inherited [it]… and I’ve got people at very different levels. If myself and the FD had to step out of the business for a period of time, not only would I want it to be able to continue to function, but [I’d want] the development of the organisation and the business strategy to continue too.”

Likewise, Mark Wood, SVP and Managing Director of EMEA for US-based cosmetics firm Revlon, stresses the importance of engagement: “Create the right environment, where people see that they can make a contribution to improving the business… [because] giving people more rewarding jobs and careers should be [fulfilling] for leaders.”

Solid foundations

For Jim Waller, who became Commercial Director at Italian food manufacturer Sacla last September, it’s a case of building on what’s already been put in place: “I’ve done a lot of graft in my first three months, setting people’s objectives for the year ahead and driving some common and consistent behaviours and ways of working. This will hopefully get people operating much more as a cross-functional team… so that every single person has consistency in their targets for the year.”

Communicating objectives and goals in a transparent way is vital. Paul McNamara, Managing Director of Insurance and Investments at Barclays, comments: “Make sure that the strategy is not forgotten in the New Year… [and] remind yourself of the key messages: what do we want to achieve and what does success look like?”

Don Elgie, CEO of insight and communications agency Creston, agrees: “Be clear, either in your own mind or by constantly referring to your business plan, about what you want to achieve… there’s no point having goals that you won’t be able to succeed in, otherwise it’s just wishful thinking.”

According to Martin Balaam, CEO at IT services concern Jigsaw24, staff will already be fired up because of the greater optimism about the economy. “The key thing will be to direct that positive energy in the right areas and prioritise the things that are going to add the most value [to the business],” he says.

Fundamentally, if performance is to be maintained, it comes back to CEOs having a team of people around them who are going to be able to provide insights, take on responsibility and challenge where appropriate.

Mark comments: “If I’m going off kilter, then I would expect the team to pick me up and say: ‘Where is this on the objectives? How does this fit into the three-year plan? Where are we going with this?’

“You’ve got to have those continuous feedback loops in place so that the leader doesn’t get carried away and lose the team. Actually, I think that’s the acid test for leadership: it’s whether you can continue to take the team with you.”

It’s a point that certainly rings true for Paul Walsh, advisor and former CEO at global drinks business Diageo: “You need great people around you and they will only be attracted and retained if there is a collegiate environment… [That’s why] you have to be prepared to listen and learn. A leader who thinks they have all the answers will very quickly come unstuck.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

 

The Outlook for Business in 2014

Comm update_17 Dec

If the winds of change haven’t been felt already, business leaders should be tacking hard and plotting a course for growth. Boards that have learned valuable lessons over the last five years around managing budgets, investing in technology and growing talent, and who have made the necessary strategic and operational recalibrations to take advantage of new opportunities, will be the ones who prosper.

Criticaleye spoke to a number of Members from around the globe, operating in a variety of areas, from consumer goods and construction to private equity and investment banking, to examine what their expectations are for 2014 and how they are planning to take advantage of resurgent growth.

According to Mark Spelman, Global Managing Director at Accenture, the broader picture is certainly optimistic: “My bottom-line message is that I think 2014 will be better than 2013 in terms of macroeconomic growth rates… because, if you look at the three major trading blocs, the US, the European Union and China, I think they’re all going to see some positive upturn in 2014 relative to 2013.”

The US remains the world’s largest economy, with upwards of $16.5 trillion in GDP, and the Bureau of Economic Analysis’s second estimate for GDP in Q3 of 2013 saw figures revised upwards from an annualised rate of 2.8 per cent to 3.6 per cent. That said there are still considerable issues to sort though.

Paul Danos, Criticaleye Thought Leader and Dean of Tuck School of Business at Dartmouth College in the US, comments: “You have all those drags like the tremendous public debt. In the US alone, they’re projecting $20 trillion by 2020, and that’s going to have to be brought down… so we can expect periodic clashes in Congress on the debt ceiling, which will create uncertainty, not to mention the question around whether the Federal Reserve will scale back its programme of quantitative easing.”

Likewise in Europe, there will be plenty of bumps along the way. “The European elections in May are going to be very important,” says Mark. “Mainstream parties are going to struggle… and the more fragmented the European Parliament becomes, the more difficult it’s going to be to drive a reform agenda in Europe.”

Those seeking to expand into Asia’s high growth markets must be fully committed to their strategy. Hellmut Schutte, Vice-President and Dean at China Europe International Business School in Shanghai, comments: “Growth [in China] will continue and markets will become more transparent due to the continuing fight against corruption. This means more of an equal chance for foreign firms… [and] business will be better for multinational companies than before.

“But running operations in China will also become more demanding. Constant upgrading of technology and improving management skill in Chinese companies erode the competitive advantages of many foreign firms. In many industries, standards in China have reached international [levels]; so, depending on the size of a particular market, the outcome of competition in China will determine the success or failure of firms in global markets. This means half-hearted engagements in China have little chance of success.”

Andy Dunkley, CEO of jeans brand Lee Cooper, who completed a $72 million (£47 million) trade sale to US company Iconix earlier this year, says: “With a business such as ours, which is 95 per cent outside of the UK, we see lots of opportunities in global growth for 2014… We have an excellent base in the Middle East, India, China and South Asia [and] we have foundations that can grow at double digits in these markets.”

The key pressure points for 2014 will be, in Andy’s view, unexpected changes in the patterns of growth: “A discussion of the reduction of tapering relief in the US [in 2013] has had a dramatic impact on currency movements and values in India and across markets that are seemingly unrelated. [Therefore, as we grow] we continue to seek a balance which means we are not over exposed in any one market.”

For Giles Derry, Partner at mid-market private equity firm Dunedin, business leaders need to bold without being foolish: “I think there’s a tightrope to walk in terms of making sure you’re investing for expansion, but without betting the farm on certain assumptions having a specific outcome… how brave you’re feeling probably depends on your end markets and which areas of the global economy you’re exporting to.”

Appetite for deals

In terms of M&A, research from Big Four firm EY suggests an uptick in deal activity after a five-year period of declining transactions globally. A survey of 1,600 senior executives in more than 70 countries conducted by EY finds that 69 per cent expect deal volumes and deal sizes to improve over the next 12 months.

David Barker, Head of Transaction Advisory Services for EY’s Financial Services division, says: “Banks continue to search for yield and therefore remain enthusiastic financiers of good deals which we think will continue to drive positive trends in M&A…

“In particular, M&A activity among banks will increase significantly following the ECB-led Asset Quality Review programme and the associated balance sheet stress tests, a process which begins in April and continues on through the summer. We’d certainly expect M&A activity to grow off the back of that… particularly around central and southern Europe, as banks choose to reposition which countries they want to operate in as core and in which they will consider reducing their levels of activity.”

Steve Pateman, Head of UK Banking at Santander, comments: “For the banking industry in its broadest context, there’s this massive regulatory agenda in 2014 because it’s the year when mortgage regulations change fundamentally, and all banks will have to adapt to a new system called MMR [Mortgage Market Review]. So, as they head into Christmas, most are probably thinking about whether they going to be ready for MMR on the 26th April.”

Reconnecting with customers is also vitally important for Steve: “[This] will hopefully be the year when banks start to rebuild trust and perform the role we’re supposed to perform in supporting the economy. If it continues to grow and recover from some of the lows of the last few years, it will be easier for the industry to do that.”

Funds for growth

On the public markets, the IPO renaissance over the last six months looks set to continue. Alastair Walmsley, Head of Primary Markets at the London Stock Exchange, says: “Q4 of 2013 is going to be the best quarter for overall capital-raising in the UK market for more than four years… [and] we are expecting the level of activity to continue, potentially even accelerate, into the New Year.

“Investor risk appetite has increased significantly which is being recognised by international companies… so cross-border IPOs, which have been pretty muted around the world this year, are looking likely to pick up going into 2014.”

Proper access to finance combined with a healthy set of accounts will certainly help most businesses that are looking to grow, not least in the property sector.Alison Carnwath, Chairman of Land Securities, says: “Because we have a strong balance sheet and are able to build into a development cycle, and because London, in particular, is under-supplied with first-rate property for occupiers, we see 2014 as being a good year for the property industry. It won’t be so easy, of course, if you’re not well-financed, because accessing funds from banks and alternative sources still remains a problem.

“Another trend we see is that, if interest rates start to rise, retailers will find it increasingly difficult because they haven’t enjoyed a particularly buoyant period. Furthermore it’s going to be testing for consumers who’ve got big mortgages to decide where they’re going to restrict their expenditure. And we expect quite a lot of it to come from them spending less in retail.”

Steve Cooper, Head of Personal and Business Banking for the UK Retail & Business Bank at Barclays, comments: “The housing market is definitely improving, albeit it is largely driven by London and the southeast. But there is improvement elsewhere as well. If I look at business turnover, what they are generating in terms of cash and sales, that’s now gone back to above where it was pre-downturn. It takes a long time to get there, but businesses are definitely generating more sales.

“What I’m not yet seeing is enough businesses investing cash for growth. I’m still seeing [them] generate and hoard cash. It’s not that they’re fearful about the future, just that they… can’t see sufficient opportunity to invest for growth.”

All change

As ever, talent and skills will be a pervasive issue for CEOs in 2014. David Stokes, Chief Executive for IBM in the UK and Ireland, says: “A key issue facing business leaders today is skills. Press coverage over the last few weeks indicates that the UK is lagging behind foreign counterparts in building core skills and estimates predict an annual shortfall of 40,000 science, technology, engineering and maths graduates causing significant problems for business if not addressed now.

“Investment in initiatives which enable young people to build the skills that are valued by the market – thinking particularly about skills that will enable the digital world – will help businesses safeguard their own future as well as the future of our economy.”

Martin Balaam, CEO at IT services concern Jigsaw24, comments: “Talent will be an issue because… anybody that’s come up through the ranks in the last five years or so will have never really been in a period of growth…

“We’re just in the throes of recruiting a new graduate intake and, also, we’re actively working with the local authority in terms of apprentices. There’s been a bit of a lull in terms of investing in the next generation, and we’re certainly turning that tap back on… so we’re bringing on people who, in addition to our existing workforce, can learn on the job and ultimately fill those roles that we believe are going to become available as we grow next year.”

***

Just from these snapshots of business sentiment it’s clear that as we go into 2014 the mood among the Criticaleye Community is markedly sunnier than at the same point last year. There will be some real areas of growth to capitalise on over the next 12 months, just so long as leaders are prepared to take a punt and have the gumption to make it happen.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Innovation – Tips from the Top

Talent certainly helps when it comes to driving innovative thinking, but the real art is in harnessing the skills you have within a business so that people feel empowered to come up with new ideas and aren’t afraid to fail. Fundamentally, an organisation has to possess a sense of direction and purpose that is communicated clearly from the top.

Graeme Butterworth, General Manager of Global Process Services at IBM, says: “The board sets out major market themes which anticipate market trends, the direction for the company and provides a clear focus for the different parts of the… business to be brought together to develop innovative market solutions.”

It’s about unlocking the excellence that exists within a business. Geraint Anderson, CEO of TT electronics, comments: “When I came to TT electronics people were not used to sharing knowledge, so we had to create ‘virtual teams’ to link up our people – manufacturers and software designers – and allow their passion to come through.”

Graeme adds: “IBM dedicates people to work on driving… innovation, pulling them in from different parts of the organisation including from the research [division]… Distributing knowledge through our people, processes and systems is one of the keys to making innovation flow throughout [the business].”

Choose your target

The goals and overall ambition of an organisation have to be defined. Geraint says: “You need to create symbols – hooks – for change too, so that the new focus becomes permanent and embedded in the culture of the business… As leaders, we must create the environment where innovation can happen.”

Linda Grant, MD of A&N Media’s Free Division, the consumer media company whose titles include the Metro newspaper, says: “The leadership team needs to put time and effort into creating the right environment and kick-starting initiatives to encourage people from across the business to come together to problem solve or invent.”

A similar point is made by Steve Pateman, Head of UK Banking at Santander: “Agility and innovation is within everyone’s grasp. Often it’s about making choices as businesses must be rewired to respond more efficiently to a customer’s changing wants.”

Linda adds: “You must also bring your customers into the mix with a commitment to truly listen to them and understand what they want… Well-prepared, innovative research that is predicated on understanding can give you invaluable insights into your customers.”

It’s something that appears to have been encoded into the model of the most innovative companies. Alison Esse, Co-founder and Director at change consultancy The Storytellers, says: “It’s the relationship with the customer that is going to differentiate your product or service… if you can put the customer at the heart of your story, it can lift people out of their silos and unite them behind a common purpose. It breeds innovative thinking.”

Geraint says: “We work with customers such as BMW that are looking 10 years ahead, so we must have the capability to innovate with them, beyond our own three-year plan… You need a clear strategy; one that has carefully considered where your business and its offering fits into the market and can carve out its niche.”

In many cases, this means being brave about where you see your relevance and long-term traction in specific markets. David Plumb, General Manager of Enterprise at O2 UK, argues that the first steps to innovation can be deciding what you don’t want to do so that “investment, time and resources can be released to create something new”.

Dipak Jain, a Criticaleye Thought Leader and Dean of international business school INSEAD, suggests that companies that put the customer first and have a pragmatic strategy for innovation tend to go beyond simple ‘transactional’ thinking to create enduring value and relationships. He explains: “Apple and Starbucks, to cite two prominent examples, have enjoyed customer loyalty because they create experiences that transcend the ordinary in terms of quality and engagement. They do this in many ways, including by paying attention to design: Apple seems to put almost as much attention into the way it packages its ideas as it does for the ideas/products themselves.”

Innovation is propelled by listening to and anticipating what customers want. Dipak continues: “Both companies also have robust digital strategies that focus on building relationships, not on conventional marketing. With a website like mystarbucksidea, the coffee giant has been active in soliciting insights from its customers and bringing them inside the company… Of course, Apple and Starbucks also maintain vibrant digital channels on Facebook, Twitter, and YouTube, all of which help strengthen communication — two-way communication — between the company and its customers. Such tools bring complexity that must be managed well, but they also bring undeniable benefits.”

Talking about innovation is straightforward enough. At the board level, it’s about making sure that, while the reputation of a business is protected, your people are rewarded for their forward thinking and not only defending and being ambassadors of the status quo. Unfortunately, many of the businesses getting into trouble today fell victim to the cultural malaise of the latter and are suffering the harsh consequences.

As David says: “While it sounds illogical, you have to think about the overall profitability of the business in the future as today’s successful division may not be tomorrow’s.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

What Makes for a Successful IPO?

The margins for error when taking a company public have always been slim. That’s truer than ever given the on-going market conditions, meaning that for those management teams considering an IPO, it’s vital to put in place a board that has pedigree and traction with investors, and to ensure the business is robust enough to hit the numbers post-flotation. Woolly fads and blue-sky ventures need not apply.

John Whybrow, Chairman of AZ Electronic Materials, says that if a new chairman is to be brought in, then they need to be involved three to four months before the actual float: “Typically, the new chairman will join the board as a director or chairman designate if the company is in the public domain; if it’s not then he will join as director. The chairman can then find out what is going on and start to set things up for when the company goes public.”

It’s generally agreed that the key elements to have in place pre-IPO include:

• Strong financial results

• A respected management team

• Experienced and influential non-executive directors

• Steady earnings (preferably with recurring revenue streams) in demonstrably high-growth sectors

• A sensibly priced business at IPO

AZ Electronic Materials, a private equity-backed concern which makes chemicals and materials for flat panel displays, LEDs and other devices, listed on the Main Market in October last year, raising just over £380 million and achieving a market cap of £914.2 million. “AZ is a classic flotation,” comments John. “It worked brilliantly – we floated at 240p and at the end of the first day were up 7 per cent. At the end of three months, we were 25 per cent up. The people who bought the shares felt good because they felt they had paid a reasonable price; equally, the private equity firms were not greedy as they didn’t maximise the price.”

Everyone felt they had gained from the transaction. At the moment, that’s quite a rare and distinguished feat as the reality of the new economy often means that expectations need to be lowered when it comes to valuations and estimated returns on investment. Nicholas Garrett, Head of IPO Executions at JP Morgan Cazenove, concedes that the public markets continue to be challenging: “A number of IPOs have been pulled in the last few weeks and the ones that got away haven’t traded particularly well. What will make a good IPO is a sound investment case for continued growth, priced at a sensible discount to peer group companies.”

A test of values

The issue of price has certainly been the sticking point for many potential M&A deals over the past 18 months. It’s the same problem which is causing potential floats to sink without a trace. “Unless vendors coming to market can be more realistic about valuations, I sense that the situation is going to be much the same in the near future,” adds Nicholas.

John states that this is where an incumbent chairman, certainly when PE firms are seeking a float as a full or partial exit, has a key role to play. The chairman can mediate with the firms and the banks and, to an extent, the management team, to make sure that “things happen sensibly” as the damage and loss of confidence in a company if the share price nosedives immediately after an IPO may be irrevocable.

The other, equally crucial task for the chairman-in-waiting is to find the right non-executives who have the appropriate knowledge and experience for steering a public company. “After the float, many of the directors will resign immediately,” says John. “As soon as you have a new chairman and a chairman of the audit committee, you have to build a board pretty fast – when we went to market there were three independent directors and I kept the two sponsors [PE firms], but they’re not independent, so I needed to recruit four non-executives pretty quickly. You also need a company secretary, otherwise the burden falls to the CFO.”

Charles “Chip” Goodyear, the former CEO of mining and resource giant BHP Billiton, recalls that the highest standards of governance were essential for an international company with listings in multiple countries. “Listing rules mean that you require a certain number of non-executives and independent directors, but that was not inconsistent with what we were doing anyway.

“What the company did do as a result of its listing in London and Australia, plus its publicly traded securities in the US, was to adopt the most rigorous standards in the markets we operated in. As we looked at policies and procedures, we determined to take the high ground where it existed across those jurisdictions.”

Chip claims that this didn’t pose a challenge at board level as everyone bought into the principles. “The bigger issues involved the integration of the organisation – once you have the framework of taking the high ground, then that’s the way it has to be… It was as important internally as it was externally for the company to make it clear that this was its position. So you had to be consistent with that as you were dealing with multiple cultures and histories across the organisation.”

Nicholas states that the question of governance and assembling a well-known and respected board is growing in importance: “We are seeing an increase in overseas companies coming to the London market. With some of these companies, where there is an overseas owner or founder who might be selling only 25 or 30 per cent of the company into the market, investors might be looking to the new board of directors to act as a protector or counterweight to the founder or owner of that business.”

Into the maelstrom

The reasons for floating a company must be watertight. If a management team hasn’t thought their strategy through, then in all likelihood they will be cruelly exposed when embarking on investor road shows. Robert Drummond, chairman of clean energy concern Acta and former chairman of the British Venture Capital Association, says: “Management needs to understand how to demonstrate their model in simplistic ways. They can have as many as a hundred presentations to large groups of people who have not got a day to hear about how a business works. Rather, there will be five minutes to explain the basic business model so any investor can understand it, and then there might be another 15 or 20 minutes to explain it in further detail. If they can’t do that, they’ve got problems.”

A lack of realism over numbers won’t be tolerated. Wiser heads in the City know that the best trick is to manage expectations by under promising and then over delivering, but it’s a lesson that many still find hard to learn. “New investors are looking for stability and growth,” says Robert. “That means they don’t want shocks; they want stable sectors and a business model that is easy to understand. Most IPOs tend to show tremendous growth prospects but, even if that’s achieved, it may not turn into profits.”

Robert states that the golden rule is not to go for an IPO “when the growth rate you are predicting is significantly greater than the growth rate you have achieved”. By this, he means that if a company has had 50 per cent growth for the last year-end, no-one is going to feel confident if a management team starts touting growth of 200 per cent for the year ahead.

Sam Smith, the Chief Executive of small-cap broker, finnCap, which works with sub-£100 million market cap companies primarily on the Alternative Investment Market (AIM), insists that rushing into an IPO is a mistake: “The management has to be certain they are putting forecasts into the market for a year and maybe even two years and hit them. What you can’t do is miss your numbers in your first year. Credibility, as we all know, takes a long time to recover.”

Naturally, the experience of the management team and the balance of the non-executive directors need to be right, but it’s the financial shape of the business that investors will scrutinise. Nicholas says: “The market capacity to invest in companies and the volatility of the market are two areas which hold back IPOs… I don’t think that investors have a mass surplus of cash to invest in equity markets – when they are looking at IPOs, some investors are considering other stocks to sell in their portfolio to make way. That heightens the investment decision for them.”

Sam questions the behaviour of some advisors, primarily serving small-caps, who encourage early-stage companies to go public before they are ready for the sake of a fee. “What you don’t want to do is to agree to IPO when you don’t know the market and you don’t have the track record to deliver on your forecasts or have the right board in place. If you try to rush through an IPO in those circumstances, then something will go wrong.”

First and foremost, the company must be fit for purpose. Added to this, the business has to be robust enough to deal with the pressure and strain of the flotation process itself. “It’s very time-consuming for the management team to go through an IPO,” says Sam. “If you have your two key people, the chief executive and the financial director, spending three months writing documents, doing the due diligence, putting the processes in place and going on investor road shows for two to three weeks, it can put a huge strain on resources. At the small-cap end, where the market is only just recovering, trying to take that amount of time out to do an IPO is a big decision.”

Nic Snape is the CEO of mapping technology specialist 1Spatial. Rather than go for an orthodox listing, he took the opportunity to reverse onto AIM in 2010 through a shell company, IQ Holdings.  Although the initial plan to float back in 2008 was shelved as the global economy crashed, the management team did choose to keep in place the reporting processes and procedures for life as a public company. “We basically decided to operate as though we were a plc,” he comments, noting that they also adopted IFRS accounting.

Notwithstanding this preparation, Nic acknowledges that the switch from being a private to public company is dramatic. “We always took the attitude that all the money we earned we’d put back into the business,” he says. “So any profit was always paper anyway – but now it isn’t, it’s intrinsically connected to the value of the business. Whereas previously we’ve carried quite a lot of goodwill and capitalised software development and amortised it; that may not be the appropriate way to run the business [now we’re a public company]. We have sort of restructured the balance sheet and the finances so we can maximise the profitability going forward. It is different, without a doubt.”

No-one seriously expects the IPO market to pick up significantly in 2011. This is partly because investors and fund managers remain extremely wary about the quality of the trickle of companies being put forward by advisors given the low valuations (in short, why would you come to market at the moment?), and because private equity firms are currently paying top dollar to snap up the most promising, scalable businesses.

Looking ahead, 2012 may be an altogether busier time for market-makers. For those companies considering an IPO, the sooner they start preparing by slotting together the various pieces of the IPO jigsaw, the better they’ll be placed to raise meaningful sums to grow the business, make acquisitions and ultimately to deliver healthy returns to investors who showed the faith.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon

Matthew

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