Unleashing Human Potential: Treating People Like People.
The idea that one can accurately predict the future performance of an organization based on a given set of variables is a very fascinating proposition. In many ways it’s no different than gambling on a professional football team. In both cases the key variable or determining factor is personnel. The company with the shrewd, “vivid spirited” CEO and the out-of-the-box thinking sales team has the greatest chance of success, as does the football team with the uber-accurate star quarterback and the injury-resistant running back (Fisher).
This should, of course, come as no surprise. In theory it makes perfect sense. However, in practice, in the real world, prognosticating success is not that easy. For one thing, corporations do not operate in a vacuum. There are external forces in play, many of which are beyond a corporation’s control, that affect their capacity to perform at maximum efficiency, i.e. government regulation, scarcity of natural resources, foreign market volatility, etc. And their revenue is derived from ever-changing marketplaces that exist within the framework of an even larger global network (AUTHOR 2010).
In addition to surviving the slings and arrows of a global economy, corporations must compete. This also makes life tougher for market prognosticators because not only are corporations competing for business, but they are also competing to keep productive employees as well as hire (or poach from competitors) potentially productive employees. And really this is an endless process; competition for talent never stops in the corporate world (O’Donnell, Kramar & Dyball 2009).
Lastly there’s the intangible element of human nature as it relates to group behavior and corporate synergy. For example, sometimes a company has all the right players on paper, but due to egos or infighting amongst top brass or an ill-defined mission statement, etc., the team members do not gel and the company falters. To draw up another analogy, think of those star-studded films that flop in the box office because the cast is, to borrow an expression, all Chiefs and no Indians (Grown Ups comes to mind).
In any event, the point is that there are many factors involved (many more than mentioned thus far) and it’s not easy to determine who is going to be successful and who is not. In fact, to date, no one has found a perfect rubric of indicators that foretell the future. And to be ultra specific, and for the sake of clarity, it helps to, as Fisher does in The People Factor, bifurcate the process of corporate prognostication into two dimensions, “The first dimension describes a business as it is today, being essentially a matter of results. The second dimension deals with what produced these results and, more importantly, will continue to produce them in the future. The force that causes such things to happen, that creates one company in an industry that is an outstanding investment vehicle and another that is average, mediocre, or worse, is essentially people” (Fisher).
But as mentioned earlier, the key factor is people. So, if one were conducting an extensive evaluation of a corporation, he/she would want to take a close look its corporate culture, leaders, and employees. he/she would want to know as much as he/she could about the “second dimension.”
This raises a whole bunch of new questions. Questions that are tied to how one goes about measuring human capital. What techniques are used? What processes are used? How does one measure someone’s, to use a trite but appropriate word, “intangibles?” Also what systems, programs, initiatives do companies employ to unleash, refine, revitalize their workforce? And on a macro level, why is this important to the global economy? It is the purpose of this paper to examine the limitations with human capital assessments and raise questions concerning the most optimal way to release human potential.
The main problem with measuring human capital is the fact that humans are, paradoxically, predictably unpredictable. That is, one can extrapolate human behavior up to a certain point. But even the most advanced evaluating systems, systems that use the latest technology and factor in the widest swath of data, are flawed and break down eventually. The idea then is not to pursue a perfect system of analysis; rather, it is simply to find one that works most of the time.
Actually, and in relation to equity analysis (which is not restricted to the second dimension), most analysts are consistently off with their forecasts. The authors of “Equity Analysts: Still Too Bullish” found, “Analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12% a year, compared with actual earnings growth of 6%” (Goedhart, Raj, & Saxena 2010). And later they went on to say, “On average, analysts’ forecasts have been almost 100% too high” (Goedhart, Raj, & Saxena 2010). Although it bears mentioning that it could certainly be argued that equity analysts are not overly optimistic on accident. Many believe they intentionally inflate numbers to appease investors on Wall Street. However, one has to wonder if this trick has worn off yet. It’s like the retail price of an automobile at a dealership, how many people actually believe the sticker price accurately reflects the value of the car?
Back to second dimension analysis, it should be stated that the way to finding a workable evaluation and forecasting system is to devise a way to both quantify and qualify human intangibles. In their research article, “Emerging Human Capital Analytics For Investment Processes,” Carol Royal and Loretta O’Donnell describe 4 tools to help investment analysts measure the intangibles of publicly traded companies. These tools are typically used for people on the outside looking in, but may also be helpful for corporations who wish to do a self-analysis.
Tool 1 is “mapping human capital using a drivers of the value of human capital.” Essentially, tool 1 relies on “internal influences that affect managerial beliefs and perceptions and management strategy include the state of the employment relations, cultural factors” and employee incentives among other things along with “external influences” that are linked to the “competitive nature of the economic environment, institutional factors…” (O’Donnell & Royal 2008).
Tool 2 is “analyzing human capital systems using the human capital wheel” an arbitrary wheel chart or graph that uses “interviews, in-house surveys, focus groups and a review of internal resources, including historical documents as appropriate” to provide supplementary information (O’Donnell & Royal 2008).
Tool 3 is “rating the organization’s human capital using a star rating system.” According to the article, “The human capital classification rating process classifies each company from on to five based on all the information gathered” (O’Donnell & Royal 2008).
And Tool 4 “is applying a human capital SWOT tool” which is “a strategic analytical too” that examines the strengths, weaknesses, opportunities, and threats of the Human capital (O’Donnell & Royal 2008).
The authors say that the result of all of this data collection and examination is that it “creates more clarity around firm performance and may cause less volatility in the ratings of firms, as it may create more certainty in the markets about the performance of firms in the short- and long-term” (O’Donnell & Royal 2008).
And maybe they’re right. Certainly, just by virtue of the fact that some information and analysis is better than none (assuming its accurate) one could concede that their tools are helpful and gives investors a more comprehensive perspective.
But there are challenges and barriers to selling the notion of a “Human Capital” analysis. And both O’Donnell and her peers are well aware of them:
“Firms implementing more systematic and standardised HC reporting may face some challenges. Stiles and Kulvisaechana (2003) capture these potential concerns, which seem particularly relevant to the knowledge-intensive biotechnology industry: fear of sensitive knowledge being made available to competitors; fear of criticism from unions of employees, creating restrictions on labour-force flexibility, and finally, concern for the practical difficulties in data collection and whether investors will understand the information once it is presented to them. These concerns are not trivial, but, in the context of calls for increased transparency by the investment community, they will need to be addressed as part of an ongoing communication process (O’Donnell, Kramar & Dyball 2009).
Words like “practical difficulties” and the notion that the HC reports may be incomprehensible to investors is admittedly troubling.
One can hand someone a well-crafted, well-researched HC report, with trenchant analysis and 5 star ratings and extensive wheel charts and potential investors and other market analysts could simply call it a load of balderdash. And to some extent, they’d be right.
That is to say that all reports are to varying degrees fallible. One can only imagine, as with the equity forecasts, that there is certainly error and manipulation in the data collection, in the drafting of the research, in the analysis, and in the reporting. So, with this in mind, it comes back down to the idea of workability. Will the report work on a number of different levels, such as: will it work to convince investors that the company is a good investment? Will it work to improve company morale (in the case of self-analysis)? Will it work to secure funding? Will it work to improve the perception of the company?
Also, what’s interesting about HC reporting and evaluation is that it is the key variable to determining the success of a company, but it’s also the most difficult to analyze and record. We all know that Warren Buffet is a financial genius, but aside for a lucky few, we all found out after the fact. In other words, predicting which corporate system works (system as in its environment, HC relations, etc.) before it reaches its tipping point of success (or failure) is still, despite all the information we have at our disposal, incredibly difficult.
When Warren Buffet said, “Investors should not bet against America, because America has systems to unleash human potential,” he was right. But his answer wasn’t based off of some human resource analytics. Buffet knows his history.
For example, in 1913 when Henry Ford started paying his workers $5 per day while shorting their workday from nine hours/day to eight/day his contemporaries thought he was crazy. “How do you expect to make money?” they exclaimed. Ford’s reasoning was simple, happy people with money in their pocket will want to spend it. And what better way to spend it than to buy a Ford? He was right. He revolutionized industry, which in turn led to the emergence of the middle class. This is what Buffet is talking about. Unleashing human potential starts with treating workers fairly.
Therefore, and perhaps ironically, the best HC reporting system or even the best system to unleash human potential may be one that acknowledges its own inherent limitations from the outset and one that isn’t formulated in the image and likeness of a sales tool. Instead the ideal evaluation system should place its emphasis on how to earnestly improve employee morale and synergy. It should be concerned with giving something back to the employees with no strings attached. After all, workers are keenly aware of when they are being taken advantage of and when they are being exploited for the betterment of the stockholders and, conversely, when someone is looking out for their best interest. In short, if one wants to unleash human potential, one should start by treating his/her employees like humans, and not like meta-circles in a giant wheel-chart (Pfeffe 1997).
Works Cited
AUTHOR? 2010 Sustainability in Key Professions: Accounting: An Action Research
Program Final Report, Macquarie University, NSW 2109.
Fisher. (n.d.), ‘The People Factor — The Second Dimension’ PUBLISHER/JOURNAL
pp. 197-202.
Goedhart, M.H., Raj, R., Saxena, A., 2010 ‘Equity Analysts: Still Too Bullish’,
Perspectives on Corporate Strategy and Finance, pp. 14-18.
O’Donnell, L., Kramar, R., Dyball, M.C., 2009, ‘Human Capital Reporting: Should It
Be Industry Specific?’ Asia Pacific Journal of Human Resources, vol. 47, no. 3,
pp. 358-373.
O’Donnell, L., & Royal, C. 2008, ‘Emerging Human Capital Analytics For Investment
Processes’, Journal of Intellectual Capital, vol. 9, no. 3, pp. 367-379.
Pfeffe, J. 1997, ‘Pitfalls On The Road To Measurement: The Dangerous Liaison of Human Resources With The Ideas of Accounting and Finance,’ Human Resource
Management, vol. 36, no. 3, pp. 357-365. .
Smith, A., 2009, ‘Buffet Sells Energy, Buys Drugmaker Stocks’, CNNMoney.com, [Online] Available at:
http://money.cnn.com/2009/08/14/news/companies/warren_buffett/index.htm?postversion=2009081418
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