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Want to Make Money on IPOs Learn About Companies HR Management Strategies

September 2, 2010
Related Topics: HR Services and Administration, Compensation Design and Communication, Featured Article

Initial public offerings, like the one just announced by General Motors, are in the news again. About 80 firms have gone public so far in 2010, up more than 500 percent from last year. With all the news about IPOs, there’s a secret about their success that has not been widely shared: Human resource management makes the difference between life and death at these organizations.

HRM factors predict performance
In a series of studies conducted with large cohorts of IPOs and within individual firms, a research team I led found that investing in employees at the time of the IPO has two separate effects on the firm.

In the short run, investments in employees had a negative effect on the initial IPO “going out” stock price. However, firm survival five years later is predicted most strongly and positively by these same HR investments. This says the people who are experts in pricing the IPOs are looking at the wrong factors, and the leaders taking advice from them may be making decisions that put the long-term performance of their firms at risk.

Structural cohesion is key to success post-IPO
The HR factors we studied fall in two buckets. The first was the degree to which the firm valued its employees vis-à-vis other assets, seen partly in whether a company has an HR officer as a senior executive. The second factor concerned the distribution of rewards, including whether stock options or profits were shared with all employees. We found that the reason HR factors had a positive effect on longer-term performance was due to their effects on what we call “structural cohesion.” Structural cohesion is an employee-generated synergy—essentially a close-knit, high-energy culture—that propels the company forward.

An IPO tends to hurt structural cohesion because senior management is focused on the outside before, during and after the IPO. Management teams are worried about investors, stock price, the IPO process and quarterly results.

The risk of poor performance in the first year post-IPO is great. When senior management is focused outward and spends less time communicating with workers, employees can become frustrated. When employees perceive unfairness from the IPO, then real customer service and quality suffer. When customers are not buying, revenue decreases. When sales go down, financials decline, and the “street” notices. Then the stock price tanks.

Post-bankruptcy firms have particular people-related challenges with IPOs. Such firms typically tell a “tale of two clusters” of employees. One group is made up of employees who plowed through their company’s bankruptcy. Employees had salaries cut, benefits reduced, friends laid off, and were sick from stress. The second cluster is the “shiny new people.” These are the newly hired and hopeful. They negotiated new contracts and were hired to be part of the new company. They don’t share the pain and suffering of the survivors of bankruptcy.

This two-cluster phenomenon lowers structural cohesion, which bodes poorly for success post-IPO. The two clusters create a divide that pulls employees apart instead of bringing them together to move forward. Without proactively dealing with this situation, these bankruptcy-to-IPO firms will have significantly lower chances of success.

People factors matter and will be rewarded
Our research demonstrates that a primary reason so many IPOs fail is that the human factor is purposefully ignored, put on hold or forgotten in the rush to do the IPO. Remember, the going-out price is positively affected by low value in HR matters. This means the spoken (or maybe unspoken) “word on the street” is that investments in employees are bad.

Our advice is to invest in the IPOs with strong, innovative HR teams. Invest in firms willing to take the first-day “hit” on their stock price and buck the trend to invest in the long term. Firms that value employees, share the wealth and are willing to take the risk and create an environment that strengthens structural cohesion will outperform their peers.

Workforce Management Online, September 2010 -- Register Now!

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