A recent study published by the University of Calgary indicates that there is a problem in the upscaling of businesses into public companies. While entrepreneurship continues to thrive in the Canadian market, very few of these companies end up going public. Instead, those that flourish are sold to other conglomerates in the sector, the overwhelming majority of which are not even Canadian-owned.
This revelation is surprising given the record high valuations and strong staff retention rates that come with going public over selling. Management and directors often have much to gain by riding the growth wave from the time of initial public offering (IPO). When a company is sold there is more likely to be job losses.
The study found that the number of Canadian businesses going public has been on a sharp decline since the late 90s. Overall, Canadian publicly listed companies have been declining by over 40% on a per capita basis. This is worrying for a country that has four times as many publicly listed companies per capita as the US and the UK.
The Canadian economy is full of innovation, particularly in high growth sectors like technology, software, biotech, and pharmaceuticals. Many companies start strong yet barely make it to public listing. They somehow end up being sold to larger firms. A 2016 Op-Ed published by the Globe and Mail indicated that about 70% of the most successful Canadian company acquisitions were absorbed by US firms. A PwC report also indicated that as much as 63% of tech company founders had settled on selling their firms as an exit strategy.
When it comes to such investment, businesses will typically have two options as an exit strategy that will allow investors to make back their money. The first is to sell to another firm. The second option is to go public, allowing shareholders greater freedom on whether to and when to sell their stock.
One of the reasons the University of Calgary study suggested for this problem is the transfer of power from management and directors of companies to third party advisers required when a company goes public. There is an imposition of outsiders with no deep understanding of the company or industry that can alter such important decisions as board composition, compensation, and strategy. The study also found that the extensive amount of governance structures and practices that publicly listed companies needed to adopt was discouraging.
The study has suggested limiting the powers of proxy advisers and putting an end to the idea that there are one-size-fits-all corporate governance best practices to be followed. It also recommends the adoption of staggered boards that would give management greater freedom from the shareholder pressure and putting an end to majority voting requirements introduced by the Toronto Stock Exchange in 2014 that make company directors more vulnerable to shareholder action.