In my continuing series on how HR adds value to investors, I will now look at how to present the value of HR related intangibles to an organization’s leaders in the financial terms they understand.
Ulrich presents “three visual exercises that highlight the importance of intangibles and spotlight HR’s impact on shareholder value”.
1. Earnings and Shareholder Value: Ulrich suggests going through the last ten to fifteen years of a company’s financial results and plot earnings and stock prices (or market cap) by quarter. This will show if the company’s market value is above or below the earnings line – a way to determine if the company has a net positive or negative intangible reputation.
2. Price/Earnings Ratio Race: This exercise compares a company’s intangibles to their competitor’s. Compare ten or fifteen years of the company’s quarterly P/E ratio against their leading competitor’s. This chart will show how investors perceive the company and its competitors. The real life example Ulrich uses is when they discovered a company had a P/E ratio consistently 20% below that of their largest competitor which suggests that investors were less confident in their management vs their competitors. With the company’s market value at $20 billion, it further suggested that their reputation cost them about $4 billion.
3. Management View of Impact f Organization and People: This exercise recommends that each member of the management team to plot, on a piece of blank graph paper, their assumptions showing shareholder value on one axis and the quality of the organization’s people (HR) on the other. This will help start a discussion about how HR issues matter in their perceptions of shareholder value. Most leaders believe that increasing the quality of people will lead to increased shareholder value. This exercise helps them visualize it better and opens up the discussion for better understanding.