After nearly two years of an active IPO market, fueled in part by special purpose acquisition company (SPAC) activity, private firms considering going public in 2022 face some potential headwinds. Timing may be of the essence as companies wait for the appropriate market opening.
That said, IPO opportunities will continue to exist. Companies considering going public should think through these three human capital issues in advance of pursuing an IPO:
Don’t wait to start – develop good governance practices in advance of the IPO
Investors are increasingly scrutinizing the governance policies of public companies, including those that are newly public. For the past few years, proxy advisory firm Institutional Shareholder Services (ISS) began recommending investors vote against or withhold votes from the entire board of a newly public company if the board adopts bylaws or charter provisions that contain what ISS deems egregious governance policies. These include supermajority vote requirements, a classified board structure, and a multi-class capital structure.
There are numerous actions pre-IPO firms can take early on:
- Start by analyzing how board composition should change after going public. Look for independent board members from diverse backgrounds.
- From there, establish independent committees and charters. Develop an annual independent board evaluation process to provide insight into performance.
- Once these processes are established, plan for how to disclose these policies to stakeholders. While certain public disclosure is required, many institutional investors are expecting more robust disclosure than has been standard in the past.
Showcasing an awareness of environmental, social and governance (ESG) topics in public disclosures can also help position a newly public company favorably to buy-side and proxy voting investors, customers, and employees. Most stakeholders do not expect IPOs to have an advanced ESG strategy, but disclosing climate risks, human capital management, and good governance practices is a good place to start.
Human Capital Management rises to the boardroom level
The COVID-19 pandemic has raised awareness over how firms manage their human capital. With so many employees working remotely and looking for certain workplace protections, companies are re-examining their total rewards plans, location strategy, performance management, and employee value proposition. Additionally, a 2020 SEC ruling requires public companies listed in the US to disclose details pertaining to their human capital management. This enhanced disclosure is driving oversight of people programs into the boardroom. Boards need a holistic understanding of how workforce decisions are being made, and how they should factor into executive compensation decisions.
Startups should begin by defining their human capital management philosophy and gain a solid understanding of their people programs. Newly public companies will need to be ready to disclose basic information on day one, with the expectation disclosure will become more detailed and savvier as time goes on.
As part of greater human capital management oversight, businesses are encouraged to set clear workforce goals for diversity, equity, and inclusion. A key component of this could include conducting regular pay equity audits to correct urgent issues and set the right course ahead of added scrutiny.
Ensure compensation programs are aligned with the market, meet public company expectations and have retentive value through the public offering.
Companies must balance internal and external factors when establishing rewards programs for the next chapter of being public. Internally, leaders should:
- Establish or review their guiding compensation philosophy
- Determine what they can afford to spend on cash and equity programs
- Ensure internal pay equity and pay for performance alignment.
Externally, we recommend benchmarking against the market, broader industry trends, market conditions and the relative financial performance of the firm.
Compensation plans will naturally evolve. Understanding where in the company lifecycle it makes sense to introduce different plan elements is crucial to managing employee expectations and ensuring plans mature along with the organization.