December 18 , 2017

“The Future of HR” From a Shareholders Perspective (Part 1 of 6)

Looking forward, standing still, or stuck in the past?Most pundits that forecast the future of the human resource function do so from a narrow perspective that assumes the future offers little more than an evolution of the past or present.  The forecasts fail to consider how radically different the profession might be if we threw out all that we do today and started with a blank slate, or if we handed functional leadership over to other functional professionals with little exposure to legacy HR thinking.

Examples exist today that provide some insight into how existing functional perspectives play out when applied to HR.  For example, when HR reports into a CFO that has a background in financial controls as opposed to investments, the function often assumes a less strategic, transactional stance focused on labor cost containment and compliance.  When individuals with a background in operations assume leadership of HR, the function often evolves to focus on expanding the capability and capacity of the organization.  If more tried and true sales leaders assumed the charge, chances are HR would become less compliance oriented, more aggressive and much more revenue focused.

But what would HR look like if it were redesigned by someone outside the organization, in particular, shareholders?  While many corporations are banking record profits emerging from the 2008/09 financial crisis, a number of stakeholders, including shareholders and government regulators are stepping up to exert more influence on the design and management of commercial organizations.

I’m predicting in the not-too-distant future, that institutional and significant shareholders will begin to take a direct interest in the talent management practices of companies in their portfolio, and that their unique perspective will serve as a catalyst to stimulate major change in HR.

“Are you remotely prepared for the radical changes that would occur if shareholders redesigned HR?”

This series will look at:

  • Why shareholders should care about human resource management
  • What the purpose for HR should be and who should be considered the customer
  • What shareholder aligned performance culture principles will guide the future of HR
  • What current HR functions will most likely look like in the future

WHY SHAREHOLDERS SHOULD CARE ABOUT HR

For decades there have been two classes of business functions, including those that produce revenue by designing, producing and selling an organization’s products, and those than handle all the other stuff that make the revenue producing functions possible, i.e. the so-called “overhead” functions. Executives, shareholders and financial analysts have historically focused their attention on the revenue-generating functions, paying little attention to the remaining functions, most often considered “cost centers.”

However, the hands off, eyes off approach started to change in the late 80’s, early 90’s when progressive organizations like Wal-Mart and later Dell demonstrated that overhead functions could dramatically impact organizational performance.  The proof started when warehousing, shipping, and inventory control merged to create a new function known as supply-chain, but has since been replicated in IT, finance, marketing and customer service functions.  Unheard of before, analysts started talking about management practices as key differentiators capable of providing one investment opportunity a strategic advantage over others.  Left out of the conversation until recently however, was interest in and coverage of an organizations talent management practices.

Four Reasons Why Shareholders Are Beginning to Pay More Attention to HR

You may have noticed already that shareholders and analysts are starting to pay more attention to HR practices, citing leadership changes and staffing related critical incidents as driving factors behind a change in their investment level or rating.  The increase in attention is driven by four key factors, including an unrelenting focus on profit/stock price, organizational effectiveness, risk and board accountability.

First, institutional and significant shareholders typically do not invest to earn dividends, they are more concerned about consistent revenue growth, or more importantly profit growth that can be used for strategic investments or stock repurchases.  Every shareholder knows that effective cost controls can dramatically increase profits, and it is not uncommon for labor costs in many industries to be the largest component of variable costs, exceeding 60%. As other overhead functions have demonstrated they can increase the return on investment in their activities, the pressure for HR to do the same has increased.  More and more investors and the analysts that inform them are looking at changes in labor productivity as an indicator of performance potential.  Organizations experiencing a drop in labor productivity or failing to grow productivity at rates consistent with or exceeding their industry become less attractive as places for institutional investors to place the billions of dollars they control. Investors with large positions will mitigate the risk to their investments by exerting more influence over the design and operation of the talent management function.

A second, and perhaps a more important reason that shareholder interest in HR effectiveness is on the rise is the abundance of research evidence (from firms like Watson Wyatt and Hackett) demonstrating a clear and direct connection between talent management practices and a firm’s stock price. Everyday, new studies emerge from consultants and researchers finally able to blend financial, operational, risk, and workforce modeling activities to produce quantitative proof connecting management actions with important business outcomes including increased innovation, productivity, and earnings potential.

The third factor driving an increase in the attention paid to HR is renewed interest in the security of the shareholders investment. Reviewing a rating from a well respected ratings agency is no longer enough due diligence to assess the risk of an investment.  Anyone studying the sudden catastrophic failure of major corporations like Enron, Bear Stearns and Lehman Brothers would note that all were cases where excessive risks were taken by mid-level employees seeking ever greater compensation rewards. While not an accepted fact, but certainly a feasible argument, all catastrophic corporate failures are the result of flawed employee compensation schemas (as opposed to executive compensation) that incent employees to take excessive risks. There is a growing realization among shareholders that the greatest threat to their investment maybe poor execution of the systems the organization uses to secure, mobilize, develop, and reward talent.

The fourth reason driving shareholders to become more interested in management activities is related to the increased pressure from government regulators, lawmakers, financial analysts, lawyers and shareholder not represented on the board to hold the board of directors accountable for critical errors. The increased pressure is clearly being felt, and is causing many to seriously evaluate the pros and cons of accepting a seat. As the demands mount, more and more boards are requesting insight into operational data and questioning executives more extensively on the rationale for and execution of certain management practices. HR activities already under the microscope include compensation, whistle blowing (conflict resolution, punishment or open communication, etc.) and compliance.

Increased Attention from Legislators and Financial Regulators

The recent collapse of global financial markets is also playing a role in transforming the future of HR. Demands for more transparency in reporting, accurate valuation of assets, and non-punitive processes for highlighting dangerous activities are encouraging regulators to impose new reporting requirements  that relate to an organizations “people assets.” Sarbanes-Oxley, now eight years old, already introduced a number of new ways in which HR activities contribute to the liability of organization.

What if Sarbanes-Oxley were to be expanded, requiring organizations to be more transparent about workforce productivity, contingent labor usage, source of innovation, performance management and rewards linkage, etc, how would HR change? Can your organization today put an accurate dollar value on all talent management problems?  Can you accurately report what labor is in use at any given point in time and identify the real market value of work being done by each resource? Can you measure the real impact of HR activities on the performance of the organization? The answer to all three questions is “no” in 97% of the organizations I have had dealings with, in large part because no consistent approach to measurement or set of standard measures exist that organizations must adopt.

While not typically a fan of regulatory action, consistency around how the performance of the human resource function is measured and reported is desperately needed.  If all organizations were required to use the same set of talent management metrics, it would become quite easy to make direct side-by-side “talent management performance comparisons” between organizations. The existence and access to such credible evaluations could instantly enable better due diligence on the part of investors.  I predict that combined pressure from shareholders, regulators and financial analysts will force HR to change dramatically how performance of the function is measured and reported.

Ownership Involvement in Talent Management Isn’t New

Having “owners” keenly interested and involved in talent management activities might seem unusual to some, but it’s actually not that new. If you need evidence indicating that shareholder’s are deeply interested in HR and talent management issues, look no further than the agendas of the annual shareholder meetings for major corporations in recent years. At the top of the shareholder influenced list of agenda topics are “HR issues” including executive compensation, CEO performance, management bonuses, benefit offerings and workforce reductions.

Direct ownership involvement in talent management topics is also quite common in professional sports and entertainment. Anyone that follows baseball knows that the owners of the New York Yankees (the Steinbrenner family) are intimately involved in the process of selecting and hiring top players. In football, Jerry Jones, the owner of the Dallas Cowboys, is at least as famous for being directly involved in every major talent decision including hiring, compensation, retention and performance management. TV Network and movie studio owners can also be counted among those in ownership that demand an opportunity to influence talent hiring and retention decisions.

Considering the Shareholder’s Perspective Is Simply Good Business

Taking into account the shareholders perspective is a good business practice, because after all, shareholders make the organization possible. Obviously, if you worked in a small store owned by someone you saw every day, you would almost automatically try (in their absence) to think and act precisely as they would. Unfortunately, with all the layers in large corporations, HR can easily become disconnected from the owners, acting all too often without adequately considering their interests.

Making decisions with the shareholders interest as a primary driver might not be a common concept in HR, but it certainly is among executives. If you’ve ever worked with a top executive for a publicly traded company, you already know that the first and last words out of most CEO’s mouths each day are frequently some variation of “have we added shareholder value?” That short but often repeated phrase should by itself provide clear direction to HR leadership to begin making decisions and taking actions that reflect both the interests and the “way of thinking” of the shareholders.

As a busy HR professional, you might not have had enough free time to notice the increasing level of interest that shareholders are beginning to have in HR, or perhaps the change hasn’t hit your organization yet. Regardless, if you consider yourself a true “business partner,” it is a good idea to understand and incorporate the best interests of the shareholders in every major HR action. The key is not to wait until shareholders “force” HR to change, but rather to anticipate what a “shareholder aligned” future HR function would look like and start delivering on that vision.

Up next…

In the next installment of this series I’ll outline what HR departments would look like if the shareholders interest and their way of thinking was the primary consideration in the design and execution of human resource management.

 

 

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.