I have to apologize for the lack of posts so far in 2014. I’ve only posted three articles in January and the first one was a summary of 2013! There’s a lot going on at work, not the least of which is overseeing the 2013 Performance Appraisal process with two times more employees than we had in the past several years. In addition to that, I’m currently in Vancouver, BC wearing my Investor’s Relations hat and working the Vancouver Resource Investment Conference.
The final action is to align HR practices and investors’ requirements. By looking at the company through the investors’ perspective, HR pros can develop a more value oriented HR strategy for the organization.
Ulrich suggests four HR practices to consider when viewing the company as an investor. These practices focus on senior management.
- Staffing: HR pros should try to involve and engage the largest shareholders of an organization in the hiring and promotion decisions. When looking at these decisions from the investor’s perspective, the staffing process may be more disciplined and rigorous. Since Ulrich’s book was published, the Dodd-Frank Act has given investors some engagement with the Say on Pay provision.
- Training and Development: When designing and conducting leadership programs for senior management, consider how the largest single investor would think of the program if they participated in it. Would they add to their position, hold, or sell off? Ulrich believes, and I agree, that investors want the participants to focus on real business issues withing the company, instead of reviewing case studies of other organizations. They would want the participants to have a clear understanding of actions to take to move the company forward after an open and candid dialog of the challenges facing the organization.
- Appraisal and Rewards: Many organizations tie performance and management behaviors to investor focused rewards by putting a large portion of total compensation into stock based incentives like stock options and RSUs. The theory is that when managers become investors through stock ownership programs, they will think and act like investors.
- Governance and Communication: This practice anticipates that investors will become more interested in the intangibles contribute as much to shareholder value as financial performance does. Behaviors like decision making, responsibility allocation, etc.
Continuing the series of how HR can add value to investors, I will discuss the importance of conducting an “intangibles audit”. According to Dave Ulrich, the audit assesses what is necessary to deliver investor value given an organization’s history and strategy, measures how well intangibles are being delivered, and leads to an action plan for improvement.
There is no info on the internet about the audit so I recommend you get a hold of the book where you can get more detail. For the purpose of this post, I am just summarizing.
The audit measures four core dimensions of the organization:
1. Keeping Promises
2. Growth Strategy
3. Core Competence
4. Organization Capabilities (this dimension has 11 possible strengths listed below)
- Shared Mindset
- Customer connection
- Strategic unity
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.
In Investors and HR section of his book, “The HR Value Proposition”, Ulrich discusses a “pattern of
techniques” that increase organizational intangibles and make them tangible. He calls the pattern the “Architecture for Intangibles”.
This “Architecture” is a sequential hierarchy that follows the steps below:
- Keep your promises – build and maintain a relationship with external and internal stakeholders for doing what you say you will do.
- Imagine the future while investing in the present – define a growth strategy and manage trade-offs in customer relationships, product innovation, and geographic expansion.
- Put your money where your strategy is – financially support the intangibles of R&D, brand names and brand equity, reputation, quality management, quality and well trained workforce, and institutional knowledge.
- Build value through the organization and people – Develop the capabilities of corporate culture, talent, innovation, collaboration, leadership, leaning, efficiency, etc. This is where HR can have the biggest impact as it shifts HR’s focus from being on people to the organizations where the people work.
An organization’s capabilities are the deliverables from HR efforts. These capabilities enhance (or reduce) investor confidence in future earnings and increase (or decrease) market capitalization. HR professionals who link their work to capabilities and who then find ways to communicate those capabilities to investors deliver shareholder value.
An example would be Apple’s capability to innovate an how they have turned that intangible into a key factor in how investors view the company. They have seen amazing market cap growth with the introductions of their iPods, iPhones, and iPads over the past decade. It now seems that the level of innovation has stalled and as a result, investor confidence has been suffering along with the stock price.
According to HR expert, Dave Ulrich, the second step where HR can adds value to investors is to have a solid understanding of the importance of intangibles – what they are in your organization and how the investor community values them.
To an investor and the investing community, the value resulting from choices and activities that occur within the company and how those investors value them are considered intangibles. In order for these intangibles to have any value to investors, they need to be visible to the public.
Intangibles consist of things like copyrights, trademarks, patents, R&D, brand names and brand equity, reputation, quality management, quality and well trained workforce, and institutional knowledge.
As Ulrich states in his book “The HR Value Proposition”:
It is all too easy to focus intangible value on what is easy to measure – investments in R&D, technology, or brand – but that leaves crucial intangibles, involving investments in organizations and people, under the radar. Organizations and people become intangible assets when they give investors confidence in future, tangible earnings, and this is an area where HR can make a major contribution.
As I mentioned in the introduction post, according to HR guru Dave Ulrich, there are six steps that HR should do to add value to the investors of an organization.
The first step is to become investor literate.
To become investor literate, you need to learn who is investing in your company and why. Who are your top five major shareholders by percentage of shares owned and why do they own your stock? What is your company’s price/earnings (P/E) ratio and how does it compare to the industry average? Who are the analysts that follow your industry and company? If possible, you should read their reports on your industry and company which will give you a good idea of how you are perceived by the marketplace.
It is also important to understand the company’s corporate governance policies and processes within your as well as recent securities legislation, Sarbanes-Oxley (SOX) and Dodd-Frank.
This information is available from your Investor Relations Department or your CFO. It’s a good opportunity, if you are not doing so already, to build relationships with another function in the company.
As a student of the HR profession, I’m currently reading Ulrich and Brockbank’s book “The HR Value Proposition” and am gaining a lot of very useful and valuable information from it. As I stated in this post, I am going to explore how HR can add value to strategic business decisions that the CEO and Exec team can use when planning.
My first post will be the introduction of a series on how HR can add value to the company’s investors. Since I am also involved in Investor Relations, this topic was very interesting to me so I want to start and spend some time exploring it since it blends both my responsibilities.
Investors mostly care about the price of the stock since it represents how the marketplace values the current and future value of the company.
Ulrich and Brockbank list six actions that HR must do in order to show they can have a direct affect on shareholder value:
- Become investor literate
- Understand the importance of intangibles
- Support HR practices that build intangible value
- Highlight the importance of intangible value to total shareholder return
- Design and deliver intangibles audits
- Align HR practices and investors’ requirements
Future posts will explore each one of these actions.