Challenges faced by public limited companies and the way forward

The role of the management of the companies is to provide a sustainable result to all the stakeholders

Introduction 

According to the present volatile business environment, it is highly important to implement a suitable structure for the organisation. Hence the management of the organisations will need to progress an appropriate understanding of organisational growth requirements. This might be driven by the requirements of various stakeholder groups. Then the management will have to decide as to how they need to satisfy the needs of their stakeholders. The nature of the company can be affiliated with these requirements. For instance, a small household company can be established as a sole proprietorship. However, a large company cannot operate under the same legal status. 

The reasons for going public limited

The organisations go public due to various reasons; when the company is a public limited company, the company is eligible to raise capital from the financial markets. They will be able to raise fresh capital by selling their shares in the financial markets. On the other hand, they also have the ability to structure different loan stocks such as bonds and sell these instruments also in the financial markets. That is a big advantage. This will improve their access to capital. Thus, if the company is looking to invest in various ventures and needs capital for the purpose, they are likely to list in the stock exchanges. 

It is also worth noting that there are certain other companies who are looking to build their corporate brand. These companies might have already grown to a level that they cannot continue to be a private limited organisation. The number of shareholders probably needs to be increased in order for them to build their credibility. The corporate governance structures also might be needed and they might have to build the trust of the future investors. These are some of the key reasons that could drive the need to go public. Thus, going public could be considered as a corporate brand building effort as well. 

There are regulatory expectations for certain companies to be public limited; for instance, the regulations in Sri Lanka highlight that all the non-banking financial companies have to be studied in the Colombo Stock Exchange. This is primarily due to the fact that apart from operating under the regulations of the Central Bank of Sri Lanka, the Colombo Stock Exchange also should provide an additional set of regulatory measures so that the performance of these companies can be continuously monitored. Thus, this shows that getting listed could be considered as a regulatory measure. 

There could be various other justifications for the companies to go public limited; however, it is important to note that when a company is public limited, there are a number of additional regulations that they have to comply with when compared with the private limited companies. They need to ensure that they adhere to these expectations so that they will be able to continue to stay as a public limited company. It’s a must. The continuous listing requirements of the stock exchanges will contribute to maintaining this regulatory framework accordingly. 

The key challenges 

The public limited companies will need to evaluate as to what are the key factors that drive their performance and how they will need to conduct the business activities in the future. The important point is that the public companies have the shares which are publicly traded in the financial markets. This means the company is in the limelight and the management will have to make sure that their performance is particularly in line with the shareholders’ requirements. The shareholders are powerful enough to influence the management if the management is unable to distribute them the returns in line with their expectations. 

The role of the management of the companies is to provide a sustainable result to all the stakeholders. However, in this instance it can be identified that if there is a clear separation between the management and the shareholders and if the management compromises the returns, they generate for a period considering the long term good of the company, the shareholders might not be satisfied. As a result of this the shareholders might decide to replace the current management. This is another key area of importance which requires attention. 

When the companies are exposed to these short-term expectations of the shareholders, it might be difficult for them to restructure or plan their operations with the long-term perspectives of the company. Thus, the management might find it difficult to carry out the activities with the long-term sustainable targets in mind. 

This is primarily due to the fact that they need to deliver short term results to the shareholders and satisfy their short-term needs, and they might not be able to maintain the long-term perspectives related to the company. This is an area with considerable difficulties for them and they might have to look into how they will need to manage these areas in the future. It is also worth to note that the management team might include the versatile personalities who are technically sound to go for the sustainable developments whereas the shareholders may not understand the efforts which are put forward by the management. 

It is further important to note that now the company will need to take many measures to ensure that they comply with the corporate governance standards as well as international financial accounting standards. These parties we need to make sure that they have to work together in order for them to achieve the right results over the long run. The management of the organisation will need to pay full attention to these areas so that they comply with all the requirements of the different regulatory standards in place. They will also need to report their financial performance from time to time and they might have to face questioning from the external parties. 

Another challenge that these organisations might have to face is that they will need to report material developments to the shareholders in terms of filing in the stock markets. This means they will have to maintain a very high level of transparency and this could actually impact the overall competitive advantage building efforts of the company. The competitors will be able to easily copy these areas due to the leakage of information through such reporting. Thus, these remain some of the key challenges that might impact the organisations and it is important that they are willing and ready to meet these challenges in order for them to become public limited. 

Going private 

There are many companies that would consider the fact that going public could be a mistake. Thus, the companies might have to go private again in order for them to continue their activities. Dell is one of the well-known examples of a public limited company going private. The company had to look into restructuring of the company and redevelopment of their portfolio of products. In order for them to achieve that being a public company was a challenge. This is the reason that they have gone private. 

When a public limited company would go private, it is important to note that the company would regain the freedom of management. It is also possible that there are only fever shareholders and the shareholders have a better knowledge associated with the company. Thus, the overall management flexibility related to the company is high. The company is now able to make quick decisions and execute them in an appropriate manner. The company will also be able to achieve beneficial results in terms of preaching the expected outcomes over the long run. The management is no longer under the pressure to deliver within a shorter period of time and ignore the long-term sustainable outcomes related to the company. 

In the case of Sri Lanka, few of the public limited companies had gone private limited due to the various reasons. However, it is also important to identify that none of these companies have gone private due to the pressure from the Stock Exchange for them to perform and deliver the short-term results. The financial difficulties that they had and other issues which can be associated with these areas had been the key reasons for the companies to go private. 

There were certain other companies like Vanik has maintained a non-compliance stance due to the financial difficulties they have endured and as a result these companies were removed from the trading platforms of the Colombo Stock Exchange. Thus, this indicates that if the companies do not have the financial strength to continue to be listed entities, that also might amount to a reason for them to get delisted. 

Conclusion 

The aforesaid discussion related to the public listing of the companies indicated getting listed as well as complying with the continuous listing requirements by the companies could prove to be challenging. They need to maintain their stance in an appropriate manner in these areas in order for them to achieve the desired long-term targets. While the companies go public for different reasons, they also turned back to private limited companies for different reasons. The management of these companies will need to identify the long-term best interest of these companies and take the right steps to develop the company status accordingly. These will allow the companies to carry out their activities and ensure that they will be able to deliver their expected returns to the shareholders. While the short-term growth intentions of the shareholders are important, the long-term sustainable results take a more important role in the context of company activities. 

(The writer is a Fellow Member of Institute of Chartered Accountants of Sri Lanka, Fellow Member of Institute of Certified Management Accountants of Sri Lanka, Fellow Member of AAT Sri Lanka, Member of Chartered Professional Managers of Sri Lanka, Associate Member of Chartered Institute of Marketing (UK), and holds an MBA and a BSc. Business Administration (Special) Hons. degree from the University of Sri Jayewardenepura.)