Human capital is typically a company’s first or second largest operating expense and controllable cost. In today’s talent-driven economy it is also the most potent source of corporate value creation. While executives widely and increasingly acknowledge these as facts, they continue to search for ways to more fully engage their workforce as the profound source of the competitive advantage they seek.
Forty-five years ago, tangible assets far outweighed the value of intangible assets in the S&P 500. In the contemporary economy, however, intangible (off balance sheet) assets, most of which are created or heavily influenced by workforce talent, comprise 90% of the S&P 500’s value [1]. Traditional GAAP accounting makes little allowance for this profound change. GAAP financial statements obscure and often understate the value contribution of a talented workforce.
CEOs recognize this shift in value creation. Several recent studies, including one by PI [2] in 2019, reveal that two issues, (1) business strategy and (2) talent strategy, are, by a wide margin, the highest priorities for CEOs. While this research confirms that CEOs have their priorities right, we find that they have difficulty acting with confidence. The paucity of reliable data and the interconnected complexities of the challenge too often constrain focused and decisive action. Now more than ever, fully realizing human capital’s potential for value creation requires a new mindset as well as new executive competencies, particularly for CEOs, CHROs and CFOs.
Thriving in the talent economy requires more progressive talent management approaches.
We believe that human capital can only achieve its full potential to create corporate value if it is more fully synchronized with both business strategy and financial outcomes. A well-conceived business strategy is, of course, essential, but business success or failure is largely determined by the effectiveness of its execution through people.
Strategy, finance, and human capital are too often misaligned in ways that significantly impede strategy implementation. The symptoms of this misalignment manifest in many ways: organizational cultures and structures that simply are not designed to effectively implement strategy, employees who don’t understand, don’t embrace or don’t know how best to contribute to the organization’s strategy, executive teams that are at odds and out of sync, high levels of employee disengagement and loss of key talent, and dysfunctional behaviors of all sorts, to name a few.
Aligning strategy (CEO), finance (CFO), and human capital (CHRO) is an extraordinarily powerful construct. In fact, best-in-class executive teams operate at the nexus of these three critical factors to materially and sustainably improve bottom line results. We refer to this as the Triple Helix of Corporate Performance. Our research shows that these hugely influential triumvirate teams have adopted a more strategically relevant, financially oriented, and integrated human capital management process that significantly improves the return on human capital investments that drive operating profit.
Drawing upon our 30 years of human capital and corporate performance research in support of our work with senior executives and CHROs, we offer three keys [3] to driving human capital value in the talent economy.
First Key: Get on the same team…really.
The CEO is primarily responsible for developing a coherent competitive strategy that defines the parameters and requirements of the business’ human capital strategy. The starting point is to define strategic workforce capabilities in terms of how a company’s strategy creates value. Where are the strategy drivers that culminate in successful company performance? What combination of capabilities most enable strategic differentiation? This means starting at the top with your strategy and working down through the organization to identify these essential capabilities and the most critical job roles responsible for their execution.
Once the connection between business strategy and workforce capability is fully established CEOs must drive the talent agenda. Without explicit, frequent CEO attention to the evolving talent requirements and organizational culture needed to accelerate strategy execution, an artificial separation between the workforce and the business creeps into the collective corporate mindset. This, of course, must be continuously addressed, and it is job #1 for talent-first CEOs.
The starting point is to define strategic workforce capabilities in terms of how a company’s strategy creates value.
Specifically, this means that human capital reviews should be tightly integrated into business operating reviews, with the same amount of time and rigor allocated to each. Doing so sends a compelling message about the value that leadership places on their employees. It also signals to line executives that human capital is central to business success and that they are expected to lead and develop their people with the same rigor they apply to other factors.
In addition, CEOs need to ensure that CFOs view human capital as a key-value driver and central factor in the company’s ability to achieve outcomes that drive shareholder value. This begins to fall apart when human capital is seen as merely a cost to be managed.
Second Key: Manage human capital as an investment asset.
Investment assets include both tangible and intangible elements which either produce additional income or are held for speculation in anticipation of a future increase in value. For most companies, human capital is the largest operating cost and greatest intangible asset. Against this backdrop, CFOs must consider human capital investments in terms of corporate value creation and be the voice of reason with respect to short- and long-arc investment horizons.
CFOs must demonstrate a deep understanding of how companies invest in people and human capital systems to accelerate strategy execution to achieve growth and sustainability goals. CFOs are uniquely suited, by role, reputation, and skill set, to help the enterprise understand the connection between total workforce investment and the creation of corporate value.
Talent-first companies are drawing on the strong financial modeling and analytical skills of the CFO for talent management and acquisition. CFOs are, in turn, often able to use these skills to help the organization drive a more effective human capital strategy.
Third Key: CHRO as a driver of financial value through data-driven human capital solutions.
Leaders too often undervalue human capital because, as mentioned earlier, GAAP accounting systems make it difficult to see the talent-to-value linkage. CHROs, in league with their Triple Helix colleagues, can support company leadership in driving economic value by providing solutions based on real insight. When doing so, CHROs need to take care to distinguish vital questions from readily available, warmed-over answers; and to discriminate real insights from merely available data.
The talent economy ushers in the golden age of the human resources management profession. This is an age where business-oriented CHROs can contribute to the corporate value equation in ways never seen before.
The valuation of human capital ultimately is measured by its productivity and its contribution to strategy execution and, thereby, corporate value. We call this measure Human Equity Value [4].
The talent economy affords CHROs the opportunity to make the same leap that CFOs and the finance function made in the past 15 years to become a true partner to the CEO. Just as the CFO helps the CEO lead the business by raising and allocating financial resources, the CHRO should help the CEO by authoring a business-first talent strategy that identifies the critical, value-creating roles in the organizational system [5], and to shape a high-performance organizational culture. Managing human capital must be accorded the same importance as managing financial capital and, perhaps even more so, as talent, in most industries, is now in shorter supply than capital.
The talent economy ushers in the golden age of the human resources management profession. This is an age where business-oriented CHROs can contribute to the corporate value equation in ways never seen before. The new role will require a decisive orientation of the CHRO as an influential member of the Triple Helix, financial acumen and extensive use of analytics, an inclination toward open talent models, and the curation of the talent experience. Most importantly, it will require a mindset shift where the CHRO thinks of themself as a Portfolio Manager of a coherent, mutually supporting solutions suite that creates a large fraction of total corporate value.
Summary
Developing a strategic process that finds the nexus among business strategy, human capital management, and desired financial outcomes – the Triple Helix of Corporate Performance – is, for most companies, both an immediate need and a daunting challenge. Doing so requires a more integrative point of view, new HR capabilities, and a tighter and more frequent collaboration among the CEO, CHRO, and CFO. Doing so, however, will give your company a distinct competitive advantage in the talent-driven economy.
[1] SOURCE: Ocean Tomo, LLC Intangible Asset Market Value Study, 2020
[2] SOURCE: The Predictive Index CEO Benchmarking Report 2019
[3] Additional “Keys” will be described in future articles in the Triple Helix series.
[4] Human Equity Value is a proprietary Ankura system for measuring and monitoring workforce productivity.
[5] Typically, these are the 2% to 3% of all roles in the enterprise, and these roles are often dispersed throughout the top four organizational bands.
© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
