Indian and global markets have seen an increase in public offerings over the past few years and the trend is expected to continue. Announcing an Initial Public Offering (IPO) or merging with a Special Purpose Acquisition Company (SPAC) is a once in a lifetime event for an organization and requires diligent planning and execution on many fronts. Organizations should start preparing 12-18 months prior to the expected listing and mobilize and engage all parts of the organization to prepare for the event. The HR function often gets engaged late in the process and the involvement is typically restricted to ESOP plan design and reporting of employee data. In our experience, this is a myopic view of HR’s role and we believe careful consideration should be given across all aspects of talent and rewards. Following summarizes some of the key considerations for HR as the organization embarks on the IPO journey.

Strengthening of internal controls, procedures, documentation, and reporting
 

Mature markets require an organization to adopt robust internal controls, documentation of various procedures and enhanced reporting. The HR sections in a prospectus and post IPO reporting cover employees and governing bodies. Such sections* may include:

 

Employees related sections

Governing Bodies related sections

  •  Employment structure

o   Number of employees by geography, by business line

o   Diversity within company

  • Compensation

o   Remuneration plan of the employees

  • Pensions

Two types of company pension schemes:

o   Defined benefit schemes – also known as final salary schemes

o   Defined contribution schemes – also known as money-purchase schemes

  • ·Employee benefit programs

o   Benefits

o   Employees’ development

  • ·Share offering

o   Employee Stock Purchase Plans

o   Reserve Pool of shares for Equity programs

  • General overview
  • Composition of the Management Team
  • Remuneration and Other Benefits of the Management Team Members .Prospectus executive compensation disclosure to include:

o   One year of compensation

o   Current/proposed short-term (and long-term, if maintained) incentive arrangements

o   Current/proposed employment contracts if any

o   Current/proposed pension arrangements including Supplemental Executive Retirement Plan (SERPs)

  • Shareholding of the Management Team

Holding requirements typically call for executives to hold a specified percentage of “net profit shares” for a defined period of time, which is often until the related stock ownership guideline is met, or, in some cases, for a defined period of time

  • Supervisory Board Committees
  • Remuneration of the Supervisory Boards Members
  • Shareholdings of the Supervisory Board Members
  • Corporate Governance

* Indicative and non-exhaustive

Environment, Social and Governance (ESG)
 

Mature markets require organizations to focus on ESG especially the ones who are yet to achieve profitability. ESG is a lens through which organizations are assessed to ascertain how they are adopting environmentally sustainable practices, whether they are treating employees equitably, fairly and respectfully, and the controls in place to ensure strong Corporate Governance.

As per Mercer’s Global Talent Trends for 2022, 88% of the executives say their board is focused on ensuring they deliver on their ESG commitments. Additionally, 96% of employees expect their company to pursue a sustainability agenda. With the rise of sustainable investments, investors invest in companies that align with their sustainability ambitions, practice good financial management, underpinned by strong ESG integration.


Accordingly, relatable employers embed ESG goals into executive objectives, foster a sustainability culture and promote ESG initiatives, implement effective governance on both environmental and social policies and make ESG as part of the Employee Value Proposition (EVP). 

Organization structure and workforce
 

A formal organization structure that is efficient and aligned with the business strategy, a highly skilled workforce (and a credible management team) is a key source of competitive advantage especially with enhanced exposure to investors, customers, vendors, regulators, and other external stakeholders.

Additionally, roles like investors relations, treasury, financial planning and analysis, financial reporting etc. would need to be set-up in order to address concerns coming from investors and analysts post IPO. An early set-up of such capabilities would ensure alignment in the creation of the equity story and support in the roadshow with investors. 

Leadership team

 

To strengthen the leadership team (also in the eyes of the investors), to comply with regulations on independent board members, as a part of expansion plans, and as a consequence of changes in the ownership structure, companies going public often appoint new executives and new senior management.

It is pertinent to establish the leadership team beyond the founders not only to provide confidence to investors that the company is not a One-Man show, but to also have people who are experienced in handling the ambiguity that comes with it. HR must ensure that individuals manning key positions are experienced and public company ready with requisite skills and competencies around forecasting, reporting (financial, operational and compliance), controls supporting KPI reporting. 

Additionally, the team would require maturity to operate with perseverance and be ready to fall back as not all filings result in an IPO or the process may prolong due to market uncertainties.

Total rewards
 

Prior and after IPO, compensation packages, short and long-term incentives need to be reviewed and adjusted to reflect new business objectives, comply with regulations, meet expectations of investors, and align with market levels and trends. This is particularly true for executive remuneration and equity-based components; however, the compensation structure may undergo change for the overall workforce (e.g., introduction of broad-based ESPP).

Additionally, as a run up to an IPO, review of compensation structure and its alignment to local laws, competitive pay ranges and equity in rewards also need to be put in place. It may also be prudent to review benefits coverage to ensure programs are market competitive and not just compliant with the statutory requirements. A fair, transparent and competitive remuneration package is often expected from a governance stand point and should be evaluated using metrics like CEO to average employee pay, pay at risk, deferred compensation component and gender pay equity across all levels in the organization. 

Key employee retention and succession
 

High attrition rates and loss of key talent are a typical risk for newly public companies, especially for those which previously were entrepreneurial start-ups. There is a significant risk that key employees would exit post IPO. This risk has to be assessed and an appropriate succession strategy has to be defined. 

Company culture
 

Becoming a listed company has a large and deep impact on internal processes, decision making, enhanced exposure to investors, customers, vendors, regulators and other external stakeholders and communication of corporate objectives. This can alter the identity of the company, its key values, and the way it relates to employees.

Being a public organization, one enjoys increased visibility and prestige, however, the decision making at times may not be as fast and agile as a private organization due to increased public scrutiny. This can alter the ways of working within the organization and such cultural change cannot be achieved overnight.

HR transformation
 

Becoming a public company stretches and modify the overall organization and can deeply affect the way it is governed, how decisions are made and the process and procedures in place. The overall HR function is likely to be affected by these changes and needs to evolve to reflect the new stage of the company. Some of the areas includes:
 

  • Going public causes an increased usage of benchmarks and peer groups to support and validate key decisions (executive remuneration is of particular importance). In general, the need for information, data and insights on compensation, benefits, HR policies etc. is likely to be higher. With transparency around pay for KMPs, a structured approach may be needed for executive remuneration.
  • Factors characterizing post-IPO companies, including increased complexity of processes and procedures (finance, compliance), organizational changes, growth objectives connected to the rationale of the IPO, and employee retention issues are likely to lead to an increased scope for the learning and development function.
  • The LTI plans may also need to be viewed with the lens of shareholder interest around strong linkage of performance and wealth creation.
     

Going public is a cumbersome and complex process and discounting the people risks can derail the process or result in adverse financial outcomes post-IPO. While there is a no magic pill for a successful IPO, early involvement of HR teams and appropriately prioritizing people strategies outlined above will help improve the prospects of a favorable experience and positive outcome.

Gourav

Gaurav Goyal
M&A Advisory Services Leader, India

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