Value Creation through Integrated People Management
Value creation through integrated people management is exemplified by the integrated reporting movement that leading companies are beginning to embrace. When I headed up sustainability for Bayer’s North America operations, integrated reporting to top executives meant that both the financial data and environmental, safety, and health data were at the same level of assurance so could be included in the same annual report. As a result, Bayer focused on improving the quality of their environmental, safety, and health data and invested in third-party audits of this data. However, according to Mary Adams in my podcast show (see episode 15 at http://scienceofsuccess.libsyn.com/podcast), in 1970, 80% of the value of the S&P 500 companies could be seen in the tangible assets of the company while only 16% today. The other 84% of company value is being driven by intangible assets. Accordingly, the International Integrated Reporting Council (IIRC) has identified 6 forms of capital, 4 of which are intangible forms of capital, for companies to include in their annual reporting (http://integratedreporting.org/2-1.pdf). While two of these 6 capitals are financial and environmental (called natural), the IIRC defines 4 more types of capitals.
In 1970, 80% of the value of the S&P 500 companies could be seen in the tangible assets of the company while only 16% today.
The 6 capitals identified by the IIRC are financial, manufactured, intellectual, natural, human, and relationship. Financial and manufactured, also known as fixed assets, are the traditional tangible capitals. The traditional tangible capitals have been tracked with great discipline through standard accounting principles by for-profit organizations. The remaining 4 capitals are the intangible capitals. It is noteworthy that the words used to describe the intangible capitals can be misleading. For example, intellectual capital is not just about patents and trade secrets but everything left behind in the company’s computers when the lights are turned off at night. In their book, Intangible Capital, Mary Adams and Michael Oleksak call intellectual capital “structural capital” and others have called it “digital capital.” The challenge with intellectual or structured capital is capturing it in forms that meet needs in the market so that it can be monetized in some way. Next, natural capital is all the environmental resources impacted to run your business. Finally, human and relationship capital are about people. The intangible capitals have not been tracked with as much discipline by for-profit organizations as the tangible capitals have. However, with more value being driven by intangible capital then by tangible capital by the S&P 500 today, not tracking the investment in intangible capital is a missed opportunity for value creation.
The capitals framework created by the IIRC is the result of applying systems thinking to value creation by a company. A systems view is about seeing the whole and looking at the interactions within the system and with other systems to understand how they impact the purpose of the system. The purpose of a for-profit organization is to provide products and/or services to society and generate profit in order to continue to meet society’s needs as they evolve over the long-term. With the systems perspective enabled by the 6 capitals, a company sees all the ways its investments impact this purpose. Seeing the company from the perspective of these 6 capitals provides the opportunity to better understand the overall aims of the company and the means of achieving these aims. In other words, the 6 capitals framework provides a new strategic view of a company’s investments and a new lens for a business often leads to the identification of new sources of value. This blog post focuses in on what a strategic approach to the management of human capital looks like.
The six capitals framework provides a new strategic view of a company’s investments and a new lens for a business often leads to the identification of new sources of value.
Long-standing for-profit organizations understand that they need to protect, enhance, and build capital at the same time they build profit. Stephen R. Covey referred to this mindset as “sharpening the saw” in his seven habits of highly effective people. “Sharpening the saw” is about protecting the golden goose, the source of the products and services the company sells. Organizations have a good understanding of how to get a good return on their tangible capital investments because they have been tracking these investments using standard accounting principles. However, many companies don’t understand how to get a good return on their intangible capital investments because they do not have a system in place to track these types of investments. In the case of human capital, people are viewed as an expense rather than as an investment in traditional accounting. The book Intangible Capital provides ways that companies can improve their tracking of intangible capital. In addition, reviewing the integrated reports of other organizations provides insight into ways that intangible capital can be tracked. In this blog post, the integrated reports of General Electric (http://examples.integratedreporting.org/organisation/239), Novo Nordisk (http://www.novonordisk.com/annual-report-2015.html), BASF (http://examples.integratedreporting.org/organisation/248), and Southwest Airlines (http://investors.southwest.com/one-reports) were reviewed for their approach to tracking human capital. This review revealed three common themes to driving value creation from an integrated people management perspective: personal development driven by employees, a focus on well-being, and an empathic culture.
The first way to drive value creation through an integrated people management perspective is personal development driven by employees. Personal development driven by employees that drives value creation cannot happen from a hands-off approach. Rather, personal development needs to be driven by employees and fully supported by management. While the way management supports employee development is unique to each company reviewed here, all four companies track spending on training beyond required training for safety and compliance. I would also expect each of these company’s has more detailed tracking of training offerings inside the company to understand the return on this training investment. By holding themselves accountable to reporting the dollars spent on training, these companies are also responsible to their shareholders and stakeholders for understanding the return on this investment.
BASF’s approach to employee-driven development is instituting a company-wide development planning process for each employee to complement annual performance reviews and applying the 70-20-10 philosophy to development. The 70-20-10 philosophy is spending 10% of development time in courses or interacting with media (e.g., video, podcasts, blogs, and books), another 20% of development time learning from others, and the remaining 70% of development time learning through experience. This approach may be too prescriptive for some cultures and may raise the question of how much work time to devote to development. Development time needed often depends on where you are on a given job learning curve. GE’s approach to employee-driven development can be summed up by this quote from Susan Peters, GE’s Senior Vice President of Human Relations: “Our new Performance Development approach emphasizes day-to-day development – driving accountability, better customer outcomes, and faster, continuous growth.” GE is embedding development into the day-to-day work culture and has a renowned global leadership institute for management to support this embedded approach to employee development. GE tracks spending and the number of participants in their global learning programs and includes customers in their learning programs. Novo Nordisk’s approach to employee-driven development is embedded in the “Novo Nordisk Way” by the 7th of their 10 essentials: “we focus on personal performance and development.” Novo Nordisk tracks how well they work the “Novo Nordisk Way.” Finally, Southwest Airlines has the Southwest Airlines University (SWA U) and states in their integrated report that “we’re challenging ourselves to continually offer new training options and to increase the number of hours Southwest employees spend in all types of training and education.” Therefore, Southwest Airlines has no prescriptions or limitations when it comes to personal development. Southwest airlines also tracks the number of participants and dollars spent on their training offerings.
Personal development driven by employees that drives value creation cannot happen from a hands-off approach.
The second way to drive value creation from an integrated people management perspective is a focus on well-being. In their integrated report, Southwest Airlines says that “wellness is its own reward.” Southwest Airlines backs this statement by offering financial incentives to eligible participants. In fact, in 2015, employees and their spouses could earn up to $400 by participating in Southwest Airlines’ Wellness Rewards program. The program includes onsite vaccinations and approaches to weight management, tobacco cessation, diabetes prevention, diabetes control, and more. Novo Nordisk’s approach to well-being is embedded in the “Novo Nordisk Way” by the 8th of their 10 essentials: “we have a healthy and engaging working environment.” As mentioned above, Novo Nordisk tracks how well they work the “Novo Nordisk Way.” BASF’s wellness program includes online access to licensed doctors, online access to nurses, health programs, and healthy living links. GE’s wellness program includes healthy cafeterias, fitness center reimbursements if there is no onsite fitness center at a location, health coaching, a variety of behavior change programs which provide education, resources and social support, and a wellness challenge creator that can sync to a wearable device to help track steps and exercise time.
The third way to drive value creation from an integrated people management perspective is an empathic culture. An empathic culture is about understanding and addressing not only customer and market needs but also the needs of your fellow employees and direct reports and of the communities where you do business. Empathy beings with listening and respect. GE’s Jeff Immelt has formed the culture advisory group made up of promising employees from around the world. GE’s progress towards an empathic culture is evidenced by 25% of Board members and 25% of Business Unit CEO’s being women because empathy can bridge the gender communication gap that can occur in the workplace. BASF and Novo Nordisk track internal promotions and management appointments by gender. Novo Nordisk’s approach to an empathic culture is also embedded in the “Novo Nordisk Way” by the 6th of their 10 essentials: “we treat everyone with respect.” As mentioned above, Novo Nordisk tracks how well they work the “Novo Nordisk Way.” While 42% of Novo Nordisk’s Board are women, none of their 8 executive management positions are held by women. For BASF 12% of their Executive Board of Directors are women (1 in 8 positions). Southwest Airlines has a Diversity Council and 20% of their Board of Directors are women.
Empathy can bridge the gender communication gap that can occur in the workplace.
The combination of personal development driven by employees and supported by management, a focus on well-being, and an empathic culture provides the foundation needed for engaged and performing employees.
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