There’s no question about it: it pays to manage people right!
This month’s book reviews (see 4 below) features a very timely publication, which states a well-known truism/truth: ‘There’s no question about it - it pays to manage people right’.
The book, ‘The human capital edge: 21 people management practices to maximise shareholder value’ proves what every Human Resource professional, and line manager worth her/his salt has always known, but could never prove.
This article presents a summary of the key findings of the research presented in the book. The book details the 21 people management practices that top management needs to avoid, or implement in order to create shareholder value.
Two years ago a Watson Wyatt study delivered groundbreaking results: Where there are superior HR practices, there is higher shareholder value. Yet a crucial question remained: Do better people management strategies actually create higher market value? Or do financially successful companies simply have more resources to allocate to human capital initiatives?
Their second Human Capital Index study allowed them to compare one set of companies at two points in time to analyse this correlation. The results show the following:
>> Superior human capital practices correlate strongly with financial returns.
>> Superior people management is in fact, a leading indicator of increased shareholder value.
>> Superior HR management leads financial performance to a much greater extent than financial outcomes lead good HR.
>> Specific HR practices as value drivers were identified, and throw a cautionary flag in front of some conventional practices actually associated with a decrease in financial performance.
The results of this study are more meaningful now than ever before (even for South Africa). While the state of any economy is largely uncertain, demographic trends are not. There is no doubt that the skill and talent shortage will continue well into the next decade and that superior HR practices are a key to attaining business outcomes.
More and more, executives will look to HR to justify expenditures on pet programmes assumed (through conventional wisdom and/or government intervention in the economy) to add shareholder value without a shred of hard evidence being offered by HR that these practices actually deliver value.
2. About the survey
In the first study, conducted in 1999, Watson Wyatt surveyed more than 400 U.S. and Canada-based companies that were publicly traded, had at least three years of shareholder returns, and a minimum of $100 million in revenue or market value. A wide range of questions about how the organizations carried out their human resources practices, including pay, people development, communications and staffing were asked.
Responses were matched to objective financial measures, including market value, three- and five-year total returns to shareholders (TRS), and Tobin’s Q, an economist’s ratio that measures an organisation’s ability to create value beyond its physical assets. Publicly available data from Standard and Poor’s Compustat database were used to access the financial information needed.
To investigate the relationship between human capital practices and value creation, a series of multiple regression analyses were conducted, identifying a clear relationship between the effectiveness of a company’s human capital practices and shareholder value creation. Thirty key HR practices were associated with a 30 percent increase in market value. Summary Human Capital Index (HCI) scores were created for individual organisations so that results could be expressed on a scale of 0 to 100. An HCI score of 0 represents the poorest human capital management, while a score of 100 is ideal.
In 2000, a European HCI survey was conducted to gain a more global perspective on these issues. More than 250 responses from 16 countries were received. The survey included 200 questions in six languages and covered companies of all sizes and from all sectors of the economy — more than a third of participants were in the Euro 500 and more than a quarter were in the Global 500. The findings from the European study were similar to the North American results, with improvements in 19 key HR practices associated with a 26 percent increase in market value.
In early 2001, the HCI research was conducted again, this time including responses from more than 500 North American companies. In this most recent research, the participants reflected a broader view of business and included some larger, more prominent firms — with average annual sales of $4.68 billion, $8.45 billion in market value and 18,697 employees on average. Fifty-one of these companies participated in both the 1999 and 2001 surveys.
The European and new North American data were then merged. The result is a complete respondent base of more than 750 companies in the United States, Canada and Europe with at least three years of shareholder returns, 1,000 or more employees and a minimum of $100 million in revenues or market value.
3. Hold on to your hats HR when you read the following!
The first HCI study confirmed that there was a positive relationship between the quality of a company’s HR practices and its economic results. So far so good. But, it did not resolve the debate that has raged for years: Do effective HR practices drive positive financial results, or do positive financial results lead to better HR practices through better funding of HR programmes.?
>> Two years ago, Watson Wyatt noted that the best performing companies did not simply have better-funded programmes, they had entirely different programmes compared to the poorly performing companies!
>> The high performers employed certain programmes (e.g., provided broad-based stock options) that low performers did not.
>> They stayed away from certain programmes (e.g., training employees for future jobs) that low performers embraced.
If it were true that good financial performance simply afforded rich companies the ability to implement elaborate HR programmes, one would expect to see the same types of programmes across the board. This was not found to be. Yet it was still not proof that superior HR management was causing high market value. The best that Watson Wyatt could offer at the time was that the relationship probably moved both ways.
4. The missing link found - there’s no question about it that it pays to manage people right
The latest Watson Wyatt study yields the missing crucial data that conclusively demonstrates that HR practices are not only associated with business outcomes, but also create them.
Moreover, a careful inspection of all the data shows that for every available correlation calculated over time, the relationship between past HR practices and future financial performance is stronger than the relationship between past financial outcomes and future HR practices. For now the weight of the evidence clearly favours human capital practices as a leading — rather than a lagging — indicator of business success.
Organisations have long focused resources on other aspects of their companies, including infrastructure, R&D, sales and advertising, just to name a few. These things can increase shareholder value creation in measurable ways. Some — but certainly not all — tried to use their human capital to increase returns to shareholders. But even these companies were taking a shot in the dark, because no one could quantify which human capital programmes were linked to good outcomes.
The link between superior human capital management and superior shareholder returns has been proven. Moreover, proof that superior HR practices drive financial results more than superior financial results drive HR practices supports the theory: If you hire the right people, create an environment that supports creative thinking and increased productivity, leveraged by technology, you will reap the rewards.
The 21 practices are:
- Create a Total Reward and Accountability orientation
- Link pay to performance
- Demand that CEO’s hold a considerable stake in the company
- Offer significant stock-based incentives across the board
- Synchronise pay
- Do not treat benefits as ‘fringe’
- Establish a collegial flexible workplace
- Understand that employment satisfaction is critical to any business goal
- Minimise status distinctions
- Make work arrangements flexible
- Do not underestimate the crucial importance of senior leadership
- Learn how to manage change
- Do not assume that workers no longer care about work (security)
- Be (very) cautious about development training
- Make communication open and candid
- Achieve recruiting and retention excellence
- Approach recruitment and retention as mission critical
- Hire people who will hit the ground running
- It’s not enough to be a great place to work; you have to be known to be a great place to work
- Involve employees in the hiring process
- Focus on the basics; people are more alike than different
So, where does that leave South Africa’s publicly traded companies?
Millions are spent on pet people management projects that line management are ‘told’ (by HR professionals) will add value to the bottom line without a shred of proof being put on the table as to whether or not they actually do!
Ask yourself, how many of the 21 practices have you staked your reputation on as a competent and professional Human Resource professional?
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