When it comes to what CEOs want from HR to help drive business value, one of their main demands is that HR help communicate the value of talent to investors, whether that means Wall Street or a lone philanthropist. At a breakout session at last week’s ReimagineHR event in London, Brian Kropp, HR Practice Leader at CEB, now Gartner, explained that the reason CEOs want this help is not because investors believe in making employees happy for its own sake, but because they are increasingly acknowledging that talent is a leading indicator of business performance and growth. Below is an overview of some ideas HR leaders should think about when approaching this opportunity:
The Growing Value of Talent
According to PwC’s annual CEO survey, the percentage of CEOs concerned about the availability of key skills as a business threat to organizational growth has risen from 46 percent in 2009 to 77 percent in 2017. This year, CEOs identified “human capital” as the second most important investment to make to capitalize on new business opportunities, ahead of “digital and technology capabilities.” Various trends, from new technologies to demographic shifts, are uprooting the core assumptions of how companies and industries operate. In our analysis of earnings calls from 1,600 of the world’s largest publicly traded companies, we found that words like “change,” “transformation,” and “disruption” have become commonplace. (CEB Corporate Leadership Council members can see the full range of insights from our Investor Talent Monitor here.)
In a recent earnings call with Volkswagen, Chairman and CEO Matthias Mueller said that “Volkswagen needs to transform. Not because everything in the past was bad, but because our industry will see more fundamental changes in the coming 10 years than we have experienced over the past 100 years.” Highlighting the value of talent is becoming one way in which organizations can gain the trust of their investors that their business still has what it takes to outperform a rapidly changing, volatile market. Jean-Paul Agon, CEO of L’Oreal, mentioned in their earnings call that they were going through a “digital transformation” whose success “stems from our very decentralized agile approach in execution with a significant investment in talent.” Conversations like these are only growing, and investors are pushing for more. Private equity firms are even taking matters into their own hands, appointing executives to oversee the talent strategies of their portfolio companies.
As we’ve observed in our Investor Talent Monitor, 46 percent of the largest public companies talked about issues related to talent during their earnings calls in 2010, but by 2016, this number had topped 60 percent. This should not be surprising: Investment firms and activists have been making the news recently for taking an active interest in companies’ talent strategies, pushing firms for greater gender diversity on boards of directors as well as for firms to publish employee compensation and pay gaps.
More significantly, on July 3, the Workforce Disclosure Initiative, backed by almost 80 institutional investors with a total of nearly $8 trillion of assets under management, requested further information from 75 of the largest UK-listed companies about their “governance of workforce issues, global workforce composition and stability, training and development of people, and worker engagement.” Weeks later, the Human Capital Management Coalition, a group of 25 institutional investors managing more than $2.8 trillion in assets, petitioned the US Securities and Exchange Commission to adopt rules requiring public companies to disclose human capital metrics, including everything from basic information on demographics, compensation, and skills, to more advanced measurements around culture, health, and human rights.
These actions do not necessarily mean that companies will soon be required to publish “talent reports” for investors. As we noted late last year, there are still challenges to human capital disclosure, and investors are still struggling to make sense of them. However, there is a clear trend of investors taking a greater interest in talent issues and looking for ways to evaluate (and even valuate) companies on this basis.
Understanding and Communicating the Value of Talent
Without further science and measurements around the link between various human capital metrics—be it employee engagement or leadership development—people data will only be as strong as the story built around it. That is where CEOs are looking to their heads of HR for help. Take the case of American Airlines. In late April, CEO Douglas Parker told investors of a plan to raise wages for crew members by a total of $930 million through 2019. The rationale behind this was that by increasing compensation, American Airlines would be able to match their competitors’ ability to recruit, retain, and engage their best talent. These improvements will then lead to better customer service, the bane of the airline industry’s reputation.
But investors did not understand the talent connection. Had Parker focused on how talent investments led to better business outcomes the company could have made a stronger case for wage increases. Within 48 hours, the company’s stock instead dropped by more than 8 percent, wiping out roughly $1.9 billion of American’s market value.
What CEOs Want From HR
At ReimagineHR, we spoke with one CEO of a multi-billion-dollar advisory firm about this issue, and he agreed that there is a large opportunity to communicate the value of talent to investors in order to paint a clearer picture of his company’s value. However, he added, while investors do understand how talent affects business performance, they are increasingly asking questions about talent as they do not know how to properly include talent management in their valuation models.
According to this CEO, what he wants from HR is to provide the business with a quantifiable framework to understand the exact connections between talent and performance—i.e., by investing in the function’s talent analytics capabilities and human capital metrics reporting. It is also HR’s responsibility to provide the qualitative stories and context behind these talent connections so that they can then be embedded into the core investor relations messages.
This is no easy task. But there has never been a greater opportunity for the HR function to shift from its stereotype as a bureaucratic and compliance function to one that drives business value, leads change, and is a primary focus of investors when deciding whether or not to buy or sell shares in a company.