3 Human Capital Issues Companies Should Consider As They Prepare To Go Public

By Kyle Holm, partner and leader of the private market practice, Human Capital Solutions at Aon. Kyle can be reached at kyle.g.holm@aon.com. 

Despite economic headwinds in 2020, the IPO market remained active. For example, the life sciences sector enjoyed its healthiest run of activity in 5 years, with more than $7B raised by newly public firms ― and we expect this trend to continue well into 2021. 

Meanwhile, the rise of special purpose acquisition companies (SPACs) has allowed companies to go public faster than ever. The number of SPACs had already more than doubled during the first 3 quarters of 2020 compared to 2019, according to CB Insights. In a volatile business environment, SPACs provide investors a faster process, more control, and fewer initial regulatory hurdles. 

After advising on around three-quarters of life sciences IPOs over the last two years and a quarter of technology IPOs in 2020, I have compiled a list of 3 human capital issues that are important to think about as companies go public. 

1. Don’t wait to get started – develop good governance practices well 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, including looking for independent board members from diverse backgrounds. From there, establish independent committees and charters and develop an annual independent board evaluation process to provide insight into performance. Once these processes are established, companies need a plan for disclosing 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.

2. Human Capital Management (HCM) 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, an SEC ruling from last year now 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.

3. 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, what they can afford on cash and equity programs, 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. The chart below serves as a guidepost for different compensation activities that often take place as a business ramps up to go public.

Phases of Compensation Planning from Startup Through IPO

Next Steps

The human capital and workplace issues exposed by the Covid-19 pandemic have been a catalyst for greater boardroom oversight of ESG issues, human capital management, and creating more fair, equitable compensation structures. 

While unemployment remains high, there was a surge in new business applications in 2020 and pent-up consumer demand. Given these conditions and private investors’ appetite for deals, we expect the IPO market to remain robust into 2021. As more and more firms prepare to go public, they should ensure their planning checklist reflects the current challenges public companies are expected to address.