BY: SHEPHERD SHAMBIRA

The origin of the idea of a capital market in the form of a stock exchange was highlighted in the first part of this article. The question of risk was raised and this week we seek to discuss the nature of risk faced by the entrepreneur who decides to list their business on a public market. Future discussions will identify the risk to the other part to the transaction which is the investor. A capital market is a place where two classes of players meet to transact business and the two parties each have objectives, fears, preferences and tastes.

The disadvantages of going public with your business

When you list on the stock exchange, your firm becomes open to any investor who may wish to take part in the ownership of shares of the business. This means that if some investors with very deep pockets decides to take over your project, they have a chance to successfully do so. All they need to do is find enough of your shares on the market to buy and become a major shareholder. The risk may include the loss of control and possibly employment. If for example,  you are working for your unlisted company as a managing director or chairman or president depending on your preference, you stand to lose such title and income that goes with it if the new shareholders do not like you! When you have invited new shareholders, your benefits and conditions of service become more formalized and this may not always fit in with your disposition. However, most investors do like to work with the promoters or a firm successful enough to achieve a listing especially during the initial years of listing. This ensures that the vision of the business and style which has carried the enterprise to such levels of success is usually attributable to an individual. It makes sense to employ a professional manager only after the firm has matured.

While decisions like starting a new product line may be done by one individual or by a small team in a small operation, a bigger and listed entity will tend to slower the pace of change as approval processes change. The need for formalized decision-making may frustrate the promoter of a firm who previously used to make all the decisions by himself. For example, good corporate governance requires that there be authority limits in approval of expenditure such that certain purchases will now require to be sanctioned by the board of directors rather than the manager alone.

The other form of risk which is normally given less attention is reputation risk. This is the risk of developing a bad reputation which can result in loss of business. Some enterprises can be easily destroyed if there is bad publicity about them. This can happen both when the bad press is true and when it is false! A business built over time through hard work and commitment can easily crumble under the power of a pen!

The risk of failing to comply with legal requirements exists for any form of business – big and small. However, this risk is magnified when you grow bigger through a listing because such growth also calls for more and stricter regulations. While the regulations are necessary, the challenge is that one will now have to depend on employees who may be tasked with certain critical functions in the bigger business. Naturally, when a firm grows bigger, delegation of responsibility is inevitable. Now, some of the employees who may be entrusted with such responsibilities may endanger the firm by acting in an unethical way.

The fact that there are challenges in going public with your business does not mean that the process is not beneficial. The most vibrant economies in the world have well developed stock exchanges and in fact most of the highly successful firms are listed on one or more stock exchanges. The truth of the matter is that there are more good reasons why it is wise to go public with your company. The critical issue is to identify the likely challenges and deal with them by putting together a comprehensive plan before things go wrong. For example, just as one requires to hedge against the risk of death by insuring their business debts as a sole trader or private company, it is also important to hedge debts and risks affecting the bigger and listed enterprise.