By Edward E. Lawler III
From Strategy+Business (www.strategy-business.com)
Most companies are operated in ways that downplay the importance of people. They have bureaucratic structures that optimize the value of financial capital, machinery, equipment and natural resources, at the expense of talent development and the opportunity for people to use their skills.
The contrast between what executives say about the importance of people and how they manage their organizations is unfortunate at best. At worst, it is a major contributor to poor organizational performance.
For the vast majority of companies today, people do matter. The market value of most companies depends in large part on intangible assets, the most important being human capital. Particularly in developed countries, businesses need workers to perform complex work at a high level. Outstanding talent is scarce, and it can be a critical source of competitive advantage.
Three features of any corporate structure clearly show whether management truly believes in the importance of human capital or is merely paying lip service to it. They are the corporate board, the human resources management function and the information systems.
When a corporation values human capital, the board of directors should have access to both the expertise and the information needed to understand talent issues at all levels of the organization. Consider the issue of expertise. A good deal of research-based knowledge exists about the retention, motivation, and development of human capital. Acquiring this knowledge and putting it to use requires in-depth expertise. Thus, a board should have at least one member who has a sophisticated understanding of the research related to human resources management, organizational effectiveness, succession planning, and learning and development.
Board members should receive regular information about the condition of an organization's talent and the way it develops and deploys that talent. Among other things, this should include information about people's attitudes and skill development levels; assessments of the availability of backup talent for key positions; and evaluations of the organization's ability to attract, retain and develop new talent. It is particularly important that corporate boards spend time on succession planning for top-level management positions.
Research on existing boards suggests that most organizations fall far short of these ideals.
When it comes to academics being on boards, the pattern is similarly clear. Finance and accounting professors sit on numerous corporate boards, but membership on a board is a rarity among professors of HR management and organizational behavior. If human resources is as important an area as many executives claim, why should it be treated any differently?
There is little question that boards spend more time on financial issues than on human capital issues. Boards also spend more time on operations issues. One reason is that they do not get systematic information about the condition of an organization's talent; they don't see the results of attitude surveys, turnover analyses, and succession plans. Particularly likely to be missing is good analytic data showing how HR metrics relate to organizational performance.
In any organization that believes human capital is its most important asset, it follows logically that the HR department should be its most important staff group. This means that HR should contain some of the top talent in the company, along with the best information technology resources, and HR should be a valued expert resource when it comes to strategy development, change management, organization design and talent management.
The HR function should be staffed with individuals who understand the business -- and who know the intricacies of human capital strategy and management systems. HR department leaders need to be involved in business strategy discussions. Sometimes this requirement is expressed as HR's need to be at the table when key business strategy decisions are made, but a seat at the strategy table is not enough. If human capital really is an organization's most important asset, human resources should "set the table" for strategy discussions by framing the issues in terms of the current condition of the organization's human capital and what talent is available in the market. This can illuminate strategic opportunities that might not otherwise be seen, and can make it clear when strategies are not feasible.
In most organizations, the HR function is staffed with competent professionals, but few have had middle or senior management jobs outside HR. As a result, they don't have the experience that helps them think of their work in the context of the larger business and its priorities. This in turn means that they often have difficulty providing the kind of strategic direction and advice that is needed.
Rarely are corporate HR programs subject to the same kind of analysis and effectiveness tests that are applied to the other key assets of a corporation. For example, HR seldom knows or asks about the return on investment of its various policies, practices, and programs. HR people typically lack the analytic skills to assess the cost-effectiveness and impact of their programs and to determine the likely effect of proposed changes in job designs, organization structure, and HR-related policies.
The quality of an organization's people will be a central focus only if it has HR measures that are as relevant, rigorous and comprehensive as the measures that pertain to financial assets and physical capital.
To be effective, a human capital information system needs to track the contribution of people to the organization's most critical and strategic objectives. It needs to provide a good indication of how productive individuals are and how their productivity relates to organizational performance. It needs to measure the condition of the organization's competencies and capabilities, especially those that are needed for superior performance.
It is particularly important for the HR department to have information technology resources that will enable it to produce the kind of comprehensive, real-time quantitative data that can be used by leaders to make fact-based decisions about talent management. This includes comprehensive data on the condition and use of the organization's human capital. HR leaders should not just generate and analyze this data; they should apply it to most critical decisions. The executive committee and the board should do the same.
Given that an organization's intangibles account for an increasing percentage of its market capitalization, it makes sense for investors to request and receive information about an organization's human capital. If human capital is an organization's key asset, then investors both need and deserve to receive regular updates on the condition of that asset. They should have access to information on turnover rates, money spent on development, employee engagement, and the organization's competencies and capabilities.
Many organizations do make some attempt to find out about the condition of their human capital. They conduct attitude surveys, they measure turnover, they track the number of job offers accepted and so on. But very few produce a regularly updated scorecard of human capital metrics, especially one tied to financial performance. The result: incomplete strategic planning, inadequate succession planning and poor use of people.
In all three areas we have considered -- corporate boards, HR functions, and information and measurement systems -- there are enormous gaps between the way organizations are managed and the way they should be managed and designed if human capital truly is their most important asset.
When senior executives resist designing and managing organizations in ways that treat human capital as their organization's most important asset, there are multiple negative effects. People feel exploited and undervalued. The best people migrate elsewhere; the midlevel people never get the development that allows them to make a real contribution; and the worst people linger, dragging the whole organization down.
It may take the emergence of a whole new generation of managers before most organizations walk the talk when it comes to talent.
Edward E. Lawler III is the director of the Center for Effective Organizations and a distinguished professor of business at the University of Southern California's Marshall School of Business. He is the author of "Talent: Making People Your Competitive Advantage" (Jossey-Bass, 2008)