HR’s Role in Designing an IPO: A Human Capital Perspective
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HR’s Role in Designing an IPO: A Human Capital Perspective

In 2021, Initial Public Offerings (IPOs) made the headlines in India as 63 companies raised Rs 1.2 lakh crore through IPOs—the highest amount ever raised in a single calendar year and more than four times the amount raised in 2020 (₹26,628 crores) as per The Economic Times report. 2021 was a record year for fundraising not just in India but the world over. 

As per an Ernst and Young report, Indian companies mobilised $17 billion through IPOs, accounting for 3.75 percent of the global IPO proceeds. The report further states that there is a strong pipeline for Indian IPOs in 2022. Key factors that fuelled the IPO market in India are strong investor sentiments, low-interest rates offered by banks and non-banking finance companies, evolving regulatory reforms, strong retail participation, ample global liquidity, new-age tech startups, huge dry powder investments, and the Indian growth story.

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Going public is a transformational event for any organisation. It forever changes how a company goes about doing business as an IPO affects the whole organisation in terms of the requirement for new skill sets, additional talent, etc. Going public also means new terminology, greater public scrutiny, and regulations. Entering the world of IPOs where there’s no how-to manual can seem a bit daunting which is why thinking through new requirements in advance and building the right plan can help an organisation make the right moves at the right times.

The CEO and the leadership team need to strike the right balance between executing the IPO transaction and managing the everyday operations of the organisation. They simply can’t take their eyes away from the day-to-day activities believing that the company’s culture will be strong enough to sustain the business without active management. 

The IPO journey for a company typically begins at least 12 to 24 months before going public and continues well beyond it. Thus, while an IPO should be a momentous event for an organisation, company leaders should not treat an IPO as the end game. Rather, they should recognise the IPO event itself as a life-changing journey from the private realm to the public markets where they should be prepared to face numerous leadership challenges ahead. The CEO and the leadership team need to strike the right balance between executing the IPO transaction and managing the everyday operations of the organisation. They simply can’t take their eyes away from the day-to-day activities believing that the company’s culture will be strong enough to sustain the business without active management. 

This is why a firm’s survival and growth are dramatically impacted by HR investments as potential contributions of human resource management can’t be ignored. HRM systems and processes play a crucial role in enabling an organisation to achieve a successful IPO and impact firm performance at the time of the IPO and after the IPO. Dr. Theresa Welbourne in her 2010 report HRM in IPOs states that the higher the rate of change, the more important the HR factors. Another study discovered that the presence of HR executives in senior management was favourably associated with post-IPO firm growth.

Also read: Strong Governance and Hiring Right Talent Are Important While Preparing for an IPO: Krishnamurthy Shankar, Infosys

PWC’s Roadmap for an IPO research suggests that proactively addressing an organisation’s human resource issues in the context of an initial public offering can increase the likelihood of a successful offering. Executive compensation and making sure the organisation has an appropriate depth of talent are examples of two key areas of focus.

Therefore, while the IPO wave continues in India, organisations need to look at their IPO journey through the lens of human capital. If an investment is to be made, it is to be made in the human capital that drives the business and not the business itself and they are mutually exclusive.

HRM systems and processes play a crucial role in enabling an organisation to achieve a successful IPO and impact firm performance at the time of the IPO and after the IPO. Dr. Theresa Welbourne in her 2010 report “HRM in IPOs” states that the higher the rate of change, the more important the HR factors. Another study discovered that the presence of HR executives in senior management was favourably associated with post-IPO firm growth.

Key parameters to keep in mind while going public

Concentrate on how the IPO will affect the company. The shared vision and mindset of the financial, legal, and human resources departments is a vital feature of this. There will also be obstacles from a culture, organisation, and people perspective. To address some of these challenges, develop a work playbook — not just about the IPO, but about the people and business. We can divide it into the following categories:

Corporate initiatives 
Going public can be a very complex process as operating a private firm for a small group of investors is vastly different from operating a public company with a large number of stockholders. Your actions will be much more visible, necessitating a more formal and transparent approach in managing the business and complying with all the legal/government requirements. You’ll need skilled specialists (who have extensive IPO experience) on board, such as auditors, underwriters, and counsel, in addition to a qualified management team and conduct business through a clear organisational structure.

Overall corporate culture and business strategy
A transformative event like IPO and the changes it brings along with it can best be managed through strong, proactive, and accessible leadership. Embracing transparency and encouraging employee communication throughout the change process can help maintain the desired culture and business strategy.

Planning compensation and trading policies 
For achieving a successful IPO, preparation is critical. The development of a compensation strategy and philosophy that guides compensation decisions at the company and relates to organisational purpose should be done in advance.

Infrastructural changes
The most successful IPO candidates typically invest two years or more in developing business processes and infrastructure, recruiting executive and advisory talent, addressing financial and reporting issues, and securing the board of directors and other key stakeholders’ commitment to their strategy. To get ready for an IPO, it is crucial to build capital market infrastructures and/or make structural adjustments.

Growth prospects
Growth is a major goal for most companies, but rapid expansion poses considerable obstacles. However, the better prepared a company is, the more efficient and successful it will be.

Challenges facing a company on the road to becoming publicly listed

  • One of the main challenges for an organisation is to educate both itself and its employees about the implications of going public for internal equity compensation practises. Beyond that, it will be critical to define an overall vision and create a clear plan that will have the desired effect of reassuring key personnel and managing retention. For this, organisations should formulate a ‘compensation policy’ that will guide all elements of how they compensate executives and other staff after the IPO.
  • Amid the upheaval associated with going public, most of the focus is on looking to ensure that you don’t lose key employees during the transition. Whereas privately held companies typically focus on stock options, long-term incentives (LTIs) at the heart of post-IPO equity compensation strategy will encourage long-term commitment and retention from employees.
  • There is, however, another viewpoint worth addressing here, that of “sudden wealth syndrome”. In this scenario, employees with share option grants on generous terms from early in the company’s life cash in on a successful flotation and become wealthy overnight. Some people will be able to adjust to the shift more easily than others. Some might continue to work well and merely enjoy the benefits of their good fortune, but some may struggle for focus and motivation, whereas others – depending upon the scale of the windfall – might resign and retire to a remote beach.

There is, however, another viewpoint worth addressing here, that of “sudden wealth syndrome”. In this scenario, employees with share option grants on generous terms from early in the company’s life cash in on a successful flotation and become wealthy overnight. Some people will be able to adjust to the shift more easily than others. Some might continue to work well and merely enjoy the benefits of their good fortune, but some may struggle for focus and motivation, whereas others – depending upon the scale of the windfall – might resign and retire to a remote beach.

Also read: Being Public Ready Or Going Public Shows The Maturity Of The Model And Sustainability Of A Company: Meenakshi Priyam, udaan

To avoid this, organisations can try to engage with individuals on intrinsic (self-sustaining source of fulfilment and performance) motivations, rather than relying heavily on less powerful extrinsic (performance bonuses, promotions, salary increases, etc) concerns. 

Alibaba since its early days, recruited third-party advisors to train its employees on not only how to manage their riches but also focus on setting personal goals beyond making money. 

“Even back when I joined Alibaba in 2000, the company was very aware of the effect that sudden wealth could have on a company and its employees,” says Porter Erisman, a former Alibaba employee and the producer and director of Crocodile in the Yangtze, as per Reuters report. “We set the company goals in terms of how Alibaba could provide value for the customers and society as a whole, rather than how much money Alibaba brought in,” the employee added.

How to maintain and grow a work culture before and after getting listed?

A company having a great culture can position it for long-term growth. An organisation’s culture should stay reflective of the company’s DNA as a clear bridge between the company’s culture pre-IPO and post-IPO reflects strongly in the public markets. However, this is not as easy as it sounds. While gearing up for a post-IPO world, the organisation must consider the needs and requirements of shareholders. As a result, the post-IPO world requires a renewed emphasis on strong and inclusive culture development since the presence of shareholders will alter the existing culture balance. So the IPO process should be a structured and managed transformation of the people, processes, and culture of an organisation. Furthermore, if flexing the culture starts once the IPO has completed and post-IPO culture is not part of the transitional design then the business will be caught off guard and will be behind the curve. For this organisations need to keep in mind the following points:

  • Adopting leading practice corporate governance principles
  • Planning relationships with shareholders and reporting policies that protect their interests
  • Working on employee wellbeing and engagement with the new structure
  • Creating a sensible management compensation structure
  • Reviewing the company values 
  • Deciding how to report on People & Culture to the Board and various committees

All successful IPOs have a unique component: Their business culture doesn’t end with an IPO but a successful IPO will start with good business culture.

Also read: Post-IPO, Connect with Employees on Personal Growth and Monetary Concerns: Pratima Thomas, Fino Payments Bank

Conclusion

An IPO is a life-changing event that necessitates the collaboration of many different parts of a company to achieve a similar goal. From building legal and tax structuring, cultivating a progressive corporate culture, creating new governance structures, developing the equity story, providing input into valuation, identifying and educating key investors, and readying the organisation for life in public avenues, there will be multiple workstreams. For many organisations, this will present a considerable cultural shift and period of adjustment. Investing in strong, innovative, and fast HR teams, setting expectations judiciously, establishing confidence and trust among employees and investors, and enlightened leadership will increase an organisation’s chances for a successful transaction and long-term success.

Stages of IPO preparation

Phase 1: IPO Planning
12–24 months prior to IPO

1. A thorough IPO readiness assessment and diagnostic for becoming publicly-traded
2. Evolve policies & practises
3. Build a relationship with investors, analysts, press, etc
4. Educate employees

Phase 2: IPO Transaction
1–6 months prior to IPO

1. Build the right team/assign roles
2. Set the target IPO timetable
3. Document creation, SEC filing
4. Launch the investor roadshow, to attract the right investors
5. Be ready for the ‘day after’

Phase 3: IPO Being Public

1. Deliver on your promises as a public company that attracts more media attention
2. Mobilise investor relations
3. Manage investor expectations
4. Deliver high-quality external reporting and disclosures, and good corporate governance.
(Source: ey.com)

 

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