Governance Matters - What Do My Shareholders Expect?
What do the shareholders in my Governance Value Chain expect?
The different governance value chain players have their own different expectations. With governance being the box that helps contain the business, it is important that the entity structure supports the expectations from any of the players. In this article, we will cover some of the expectations that shareholders may have.
Shareholders: Being the part of the funders of the business, shareholders require at least annual communication on the financial performance and financial position of the business. There may be key metrics that they would require reporting on, depending on how they acquired the shares. It is important that these be defined as early as possible to enable the management to track these metrics as part of day-to-day operations, as opposed to measuring in hindsight.
Shares can be issued in the following ways:
- IPO (Initial Public Offering): This is where the entity’s shares are listed on a stock exchange like the Johannesburg Stock Exchange, and typically moves from being a private company to being a public company. This requires a long process of compliance with the Stock Exchange rules prior to the initial listing, as well as for the maintenance of the listing.
- Private Equity: A private equity firm can purchase shares in private companies, with a view to growing the company to a greater valuation than when the company shares are purchased. This is done by high-net-worth individuals or private equity funds themselves. Most private equity happens with established companies as opposed to startups. The fund would also normally be involved in some parts of the management of the business.
- Venture capital: Venture capital is when startups get investments, with not much trading history, basically financing an idea or even a person with a track record that demonstrates that they can bring an idea to life and eventually achieve significant profits. There is normally no involvement from the funder, however, there may be some reporting requirements.
- Friends and family: These are an integral part of most people’s initial business plan. Expectations are usually not too strenuous, however, the investors still wish to generate a return, even if they may give it some time to get there.
When looking for shareholder funding, it is important to understand what type of shareholder you are looking for, as well as noting what your non-negotiables would be when it comes to negotiating the terms of the shareholders’ agreement. An example may be that you may have a family business where you exercise control (even though the shares are owned by various family members). A new shareholder may feel that they need to be operationally involved, and this often leads to conflict. You would want to ensure that your shareholders’ agreement is clear in terms of the roles and responsibilities of the different shareholders.
Phuthanang Motsielwa is a Chartered Accountant and Registered Auditor, who co-founded and co-runs her firm PSTM Auditors Inc based in Johannesburg. She has also been a member of various boards and committees in various industries and continues to do so.