How to Inform and Energize Investors on Your Human Capability Agenda

By Dave Ulrich, Rensis Likert Professor, Ross School of Business, University of Michigan, Co-founder, G3HC (dou@umich.edu) & Norm Smallwood, Co-founder, G3HC (nsmallwood@rbl.net)

Imagine if you were asked to present (or help prepare a presentation) to your investors (debt or equity) about your company’s “people and organization” agenda.

We have worked on this scenario for over 25 years since a CEO founder asked us how to improve his firm’s price/earnings ratio of 20 to be closer to his competitors of 40 to avoid risk of takeover. We realized that much of the P/E ratio was tied to people and organization. But neither he (nor we) had a good answer and his firm was acquired by the competitor. 

Since then, we have studied, written books and articles on, and advised boards and leaders on the importance of investors fully appreciating and valuing “people and organization”.  

Investor Attention to People and Organization

Today, investors are paying more attention than ever to people and organization issues because:

1.      Intangibles represent up to 90 percent of market value (see figure 1). We have found that people and organization are a major part of what make up intangible value.

2.     Risk does not just encompass the traditional categories of compliance, financial, strategic, and operational risks. Risk is also related to people and organization.

3.     Strategic reinvention (often with a digital agenda) requires as much attention to people and organization as to articulating a vision, mission, or purpose in defining and accomplishing strategy.

4.     Competitive advantage and differentiation in not just uniqueness of products, services, access to capital, and technology but also people and organization.

Investors are increasingly considering a firm’s people and organization work in their predictions of firm performance and valuation models.

 Your presentation to investors is also relevant to boards who oversee firm strategy and performance, senior executives who set strategy, line managers who deliver on strategy, and HR professionals who architect and facilitate the people and organization agenda to make strategy happen.

Today’s Response to Investors

Through dozens of interviews with senior business and HR leaders, we asked about the degree to which people and organization are part of investor dialogues: we have received three general responses.

First, some have said these issues are not included or may only get a few minutes on an investor call or road show—and then only at a high level (e.g., “We care about our people.”).

Second, most investor conversations focus on one or two people and organization initiatives such as employee engagement, leadership succession, CEO or senior executive pay ratios, diversity statistics, employee productivity, or another talent initiative. These isolated indicators are starting to show up in investor governance reports (e.g., ISS or ESG reports).

Third, some companies have frequent contact with investors (or analysts) to help them understand their firm’s people and organization issues, often through compensation and proxy reports.

Most of these responses represent piecemeal efforts without an overall framework (like GAAP for financial reporting or COSO for risk management) for reporting people and organization initiatives. And most lack empirical validation that the reported initiatives deliver value.

After 25 years of working in this field with many fits and starts, we propose an outline of a people and organization investor presentation that will inform and energize investors (and others).

Tomorrow’s (Emerging Today) Investor Presentations

We propose a six-step presentation logic that could be used with investors (or boards, senior executives, and HR professionals).

1. Show that HR is not just relevant but material.

One person we talked to said HR is important but not material because it has not been proven to affect financial performance. We disagree. Research shows that people and organization impacts financial, customer, and community results. For example, our research on 5760 organizations found that investments in Human Capability predicts:

• 44 percent of revenue per employee.
• 26 percent of cash flow (EBITDA).
• 25 percent of investor confidence in the future (Tobin’s Q).
• 36 percent of fraud.
• 48 percent of litigiousness.

We suggest sharing this generic research and then sharing specific insights on your company by comparing your P/E ratio against your major competitors for the last five years. A P/E ratio is a high-level indicator of investor confidence in your future. Or you can simply ask the members of the board or executives how much they think people and organization drives results and how well they think your company is doing.

 This step builds the business case for attending to people and organization work.

 2. Define and use an integrated framework for Human Capability.

Avoid the trap of presenting single initiatives as an overall Human Capability agenda. We have evolved the definition of isolated people and organization initiatives to an integrated Human Capability framework that organizes 37 initiatives into four categories (talent, leadership, organization, and HR function) that you can discuss in any presentation (see figure 2). Like a menu at a restaurant, this framework is both simple (four categories) and comprehensive (37 initiatives).  This framework can be used to inform Human Capability investments that might have the most impact on investors.

 This step categorizes unfocused and isolated people and organization efforts into a clear Human Capability framework with four pathways and 37 initiatives that might give investors more confidence. 

3.  Present evidence about how you perform on the four human capability pathways

Your investors will want to know how you are doing in these four pathways, compared to all other firms, firms in your industry, and top 10%. These comparisons are accessible through scoring your public disclosures (see www.g3humancapability.com) and reporting your scores in the four pathways versus comparison groups (figure 3). This information provides investors with a visual dashboard of how you perform today.

This step gives you a visual of your current state.

4. Determine where you should prioritize Human Capability investments to deliver outcomes that matter.

Given your current Human Capability performance, investors will want to know which pathways and initiatives you should prioritize to build their confidence in your future earnings. Rather than focus on a popular initiative because of personal interest, best practice of others, or social desirableness, you can pose three questions to prioritize where to invest to deliver value:

·       Weaknesses: How well do we do the initiative today? Focus on the pathways and initiatives where you are below parity.

·       Impact: How much value does the initiative deliver to stakeholders? Focus on the pathways and initiatives that will deliver the business results you care about.

·       Variance: How much opportunity do we have to improve? Focus on the pathways and initiatives where you can best differentiate from others.

 This step helps you know where to allocate scarce resources for maximum impact.

 5. Track your performance over time to see improvements in both Human Capability initiatives and their impact on outcomes.

The most important comparison you can make is to yourself: track your company’s progress over time. As you prioritize and invest in Human Capability initiatives, you will be able to track improvements not only in how you score against others (figure 3), but how your Human Capability improvements deliver your financial, customer, and community outcomes. When your investors see that your Human Capability efforts are delivering sustained results, they will gain confidence in the future.

 This step informs long-term Human Capability investments for impact.

 6. Intentionally disclose your Human Capability efforts.

The old adage, “If I tree falls in the forest and no one heard it, did it make a sound?” applies to Human Capability. You should make intentional choices about what Human Capability work you chose to disclose in order to have the right conversations. On the one hand, this work increases investor confidence; on the other hand, your Human Capability work may be your “secret sauce.”

 This step helps you know what, how, and to whom you disclose your Human Capability work.

 Conclusion and Action

Human Capability may become a significant part of presentations to investors, and/or boards, executive teams, leaders at all levels, and HR. These six steps will make these often-abstract ideas operational with specific frameworks, actions, and metrics.

 We hope our work will help move this agenda forward. See: www.g3humancapability.com for more information on how to do so.

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Dave Ulrich is the Rensis Likert Professor at the Ross School of Business, University of Michigan, and a partner at The RBL Group, a consulting firm focused on helping organizations and leaders deliver value.