Governance Can Drive Success for Small and Mid-Caps
Experience shows that, after listing on the stock market, SMEs benefit from continuing to draw inspiration from certain venture capital and private equity methods in terms of board organization, executive equity incentives, investor relations and fund-raising processes. At the same time, they have to combine them with the specific requirements of being a listed company.
Debates about the structural undervaluation of small and mid-caps, their limited access to financing, and the lack of attractiveness of the stock market for SMEs regularly resurface.
In response, stakeholders in the Paris financial market are calling for reforms to encourage IPOs and to better channel savings toward listed SMEs (which still account for more than 500 companies in France) by simplifying their regulatory and tax environment.
Beyond the financial and regulatory dimensions, another lever is essential: the quality of governance. Economic studies show that governance is not merely a compliance issue: it is a key driver of value creation, influencing investor confidence and, ultimately, access to capital and market valuation.
At the same time, it is recognized—by standards such as the Middlenext governance code—that SMEs cannot be expected to organize governance in the same way as large corporations. They face distinctive constraints: limited resources to support extended boards or multiple specialized committees (as recommended by the Afep-Medef governance code), strong dependence on founder commitment, and the challenge of balancing minority shareholder protection with the need for rapid financing decisions.
Nonetheless, unlisted companies often adopt certain governance practices inspired by listed companies as their shareholder bases expand to include financial investors: enhanced reporting, greater transparency, and clearer conflict-of-interest procedures, in particular.
But the inspiration also works in reverse. In response to recurring criticism, listed SMEs benefit from observing certain governance practices of their unlisted counterparts —and, very often, from their own pre-IPO experience —in several key areas.
Independence and the Active Role of Directors
In private equity, directors are partly appointed by financial investors and exercise effective strategic control and regular operational monitoring, without hesitating to cast a critical eye over management’s plans.
By contrast, in many small listed companies without controlling shareholders, directors are often chosen by management itself, which may create a risk of collusion or reduce them to a supervisory role, even when the independence criteria are met. Executives are more frequently appointed as directors without sufficient justification.
As a result, management teams are increasingly interested in finding external, recognized personalities (whether or not linked to shareholders) who can add strategic value to the board, while making it a communication tool for the market. In the same way, listed growth companies now usually offer their main investors board observer positions, echoing a common practice in unlisted start-ups.
Alignment of Interests with Management
In unlisted, fund-financed companies, management packages (BSPCEs, preference shares, etc.) are standard, with strict attendance and performance conditions.
In listed SMEs, by contract, the lack of equivalent tools or sufficient cash to pay variable remuneration often leads to excessive reliance on free share grants with weak performance criteria, in contradiction with governance codes.
Boards, who must remain vigilant about these dilutive incentive schemes, are increasingly inventive in adapting private equity incentives, using performance shares or encouraging direct executive shareholding to ensure alignment.
Proactive Investor Relations
In private equity, managers maintain ongoing dialogue with investors, including those outside the board. In listed SMEs, however, interaction with shareholders is sometimes confined to the annual general meeting and, at most, one or two analyst presentations per year. Minority shareholders often struggle to gain visibility or operational leverage - unless they take an activist stance.
To counter this, listed SMEs must move beyond market anonymity and shareholder passivity by proactively engaging key investors. This requires shifting from traditional quarterly meetings (designed for large groups) toward targeted, bilateral exchanges—while respecting regulatory constraints on information equality and market abuse, as well as board prerogatives.
Discipline in the Fund-Raising Process
Some listed SMEs resort to complex financing, such as equity lines involving the exercise of options (PACEO), often used in urgent liquidity situations where alternatives (credit or share issues) are unavailable.
These mechanisms are highly dilutive for shareholders, make the capitalization table hard to understand and exert downward pressure on the share price. The AMF has repeatedly warned of these risks, and a French Supreme Court ruling on 9 July 2025 confirmed that such instruments may face legal challenges.
Outside the stock market, hybrid instruments—such convertible bonds, “Air” warrants, or capitalizable shareholder loans—offer financing flexibility without undermining future fundraising. Above all, these processes are structured and coordinated among stakeholders.
These processes are not incompatible with the status of a listed company. Such methods are not incompatible with listed-company status; they simply require discipline in anticipation, governance, timing, and communication. Increasingly, we see private equity investors participating in deals that offer listed companies attractive alternatives, whether through capital injections or debt financing.
Towards Harmonization with Private Companies?
The governance of small and mid-caps is evolving away from the sometimes cosmetic model borrowed from large caps and toward the rigor and pragmatism of private equity. This is a lever of attractiveness largely in issuers’ own hands, though institutional investors also have a role to play.
Unlisted companies, meanwhile, continue to learn from listed peers—but also serve as models, especially at a time when investor confidence in the small and mid-cap segment remains fragile.
On the other hand, the world of listed companies—including large caps—is shifting toward a rebalancing of power in favor of shareholders, echoing private equity dynamics. Examples include “say-on-pay” votes and AMF recommendations on consulting shareholders before major asset disposals. This may well indicate the broader direction of travel: toward convergence between public and private market, in governance and beyond.
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The Corporate – M&A team advises a wide range of clients — listed and unlisted companies, executives, board members, entrepreneurs, investment funds, and other investors — at every stage of their development: company formation and structuring, corporate governance, acquisitions and disposals, opening up capital to investors, fundraisings, mergers and restructurings, shareholders’ agreements, management incentive plans, and disputes between shareholders.