The transition from being a privately owned company to becoming a publicly traded company listed on a US stock exchange requires more than ambition. It requires an entirely new mindset, one that recognizes and embraces the profoundly altered state in which you will now be running the business.
For starters, you are no longer the owner. Your stockholders are the owners. You are their employee.
For another thing, you are no longer the boss. Your Board of Directors is now in charge, and they will make all significant decisions affecting the company.
Why would any successful business owner want to give up the control that enabled them to build their thriving enterprise in the first place? Capital! Access to the US capital markets offers a path to future growth that may not be available in other, less liquid markets. The US marketplace is the largest and most liquid in the world, attracting a highly diversified pool of investors. For many private companies in Asia, particularly for those banking their future on cross-border strategies, US exchanges offer a ready market.
Unlike some exchanges in Asia, where the stock market is predicated on government policies that favor investment in certain industries, the US capital market is driven by shareholder confidence in the management team and your stewardship of the company. The price of your stock is whatever investors are willing to pay for it, based on how confident they are in your ability to steer the company to growth and profitability. Without the confidence of your shareholders, your stock price may discount your company’s true fundamentals, and the capital opportunity that drove your decision to list your stock dissipates alongside your market value.
Once you make the decision to list your stock on a US exchange, you effectively accept that your new job is building and maintaining the confidence of your investors.
Unlocking Investor Confidence
Consistency and transparency in your financial reporting are the keys to unlocking investor confidence. No one likes surprises – least of all those who put their financial faith in you to run a profitable company with enticing prospects for the future. US regulations require public companies to keep investors fully informed about their current financial health through detailed quarterly and annual reports.
Investor confidence is the Foundation for Success as a Public Company in the US.
For companies pursuing a US IPO, the idea of open and transparent financial reporting has no precedent. It takes a seismic shift in attitude and outlook to fully embrace the public obligations you now have as CEO of a company trading on a US stock exchange.
Making sure your financial information is auditable is the essential first step in undertaking an IPO; without auditable data, the IPO cannot occur. To ensure the data from your operations flows into your accounting systems, your CFO will implement an ERP system and will see to it that your books and records are complete and that all necessary documentation is available to your auditor.
Engaging a reputable, reliable audit firm with the right experience is critical to this process. The outside auditor’s job is to review your policies and procedures and to make sure your financial controls are reasonable and reliable. Their focus will be on the technical aspects of your financial management systems to make sure they are compliant with US regulations.
Your auditor also plays an important role in coordinating your financial reporting with your SEC counsel and investor relations team, supporting the timely release of quarterly and annual financial statements to the public.
An Investment in Accuracy and Transparency
The majority of Asian companies interested in US IPOs are not focused on the importance of cultivating positive investor relationships through transparent financial reporting. They consider the finance department a cost center, rather than an essential component in their future prosperity as a publicly traded company. Some make the unwise decision to hire a smaller audit firm without the necessary public company experience, in order to contain costs and minimize the financial control environment. They fail to recognize that saving pennies now will cost them dollars in the long run if incomplete or incorrect financial reports are issued.
Inevitably, any errors will surface, and a restatement will be needed. This is a certain red flag for investors, and the resulting erosion of investor confidence will likely have a significant negative impact on your company’s stock price. An experienced auditor will do the right job to make sure your financials are consistently accurate, reliable and compliant with US regulations.
US public accounting firms are closely regulated by the PCAOB (Public Company Accounting Oversight Board), which enforces the highest standards of ethics, integrity and independence. This is an important safeguard for investors and a central factor enabling the US capital markets to function.
The PCAOB’s insistence on auditor independence is especially critical. Auditors are prohibited from having a financial interest in any company for which they perform services. And because public auditors report to their client’s Board Audit Committee and not to management, they are able to be scrupulous in their review of company data and their assessments of financial controls, policies and procedures, and management performance.
Over the past 15 years I have observed a lot of improvement in financial reporting by China-based companies in particular, as they have been the most aggressive among Asian companies in pursuing US IPOs. The new generation of Chinese CEOs wants access to investment capital to grow their companies, and they are willing to meet the rigorous financial reporting obligations required by US regulations. Their path to listing on a US exchange could be a good example for CEOs in other Asian countries, where we see a growing number of companies looking to the US market. This is major change in mindset for Asian CEOs and points to an exciting future of new growth and cross-border expansion.