Human Capital Handbook - V1N2Jun11

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Conceived by Dr Michael Reddy Author Community Host Stuart Shaw Editor Anna Lloyd Designer Natalia Reddy
Volume 1, Number 2 Published June 2011 ISBN Number: 978-0-9567311-2-8

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THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP
Dont read this alone. Its dynamite. Read it out loud, read it with colleagues.
Eric Flamholtz
Dont read it before falling asleep. It will keep you awake. Dont start on page one. Hop to the end, skip to the middle, jump from one article to others that intrigue. Dont keep it to yourself. Email it to everyone you know, including your boss, unless you are the boss. In which case, dont keep it to yourself. Tell everyone in the office. Dont keep quiet. Challenge the authors if you dont agree with them.
Carol Royal & Loretta ODonnell Michael Walton
Heisenberg
Ted Cantle
Michael Reddy
Dave Ulrich
Dont think this is it. Its not. This is a living document. Its designed to grow, and to include your voice too.
editor@hubcapdigital.com
Howard Marks
Amy Wilson
Lastly, human capital isnt an abstract. Its the people in your business. If you know your people, you know your business. And so do they.
Ben Dyson
After the first instalment of the Human Capital Handbook (Volume 1, Number 1), published February 2011, we were naturally keen to know how it was being received. In the event weve been gratified by the response from many different corners (even Seth Godin thought it was neat), sufficiently to be encouraged to produce a second edition. So new voices, just as varied in subject as before, just as rich in insight, just as thought provoking. Just as timely too. 2011 will be remembered in the business world for many things, one of them being the steady rise of interest in human capital management analytics as a measure of the maturity of a business, and therefore its sustainability in the long term. Something that is and will increasingly have a bearing on the valuation of a business made by the financial analyst community. Which brings us to address a question we are often asked from the first instalment: Why so much focus on the investor perspective? Quite simply, we believe Human Capital Management lies at the juncture between business and the wider investment world. Equity analysts recommendations are derived for the most part from well-worked computer generated algorithms and deliver estimates of future earnings, which to us however is an incomplete basis on which to judge the sustainability of a business at least to the extent that a business depends on its people. Analysts themselves readily accept this but feel ill equipped to put shape and size on the soft stuff. HPA believes it is possible to put hard edges on the soft stuff through its Index of HCM maturity, currently being built. This will be the core theme of the Third Volume of the Human Capital Handbook 2011 to be published towards the end of the year. Meantime enjoy more of the background in Volume 1, Number 2. Michael Reddy, Ph.D., AFBPsS, FRSA
"I was a bit taken by surprise by your Handbook, opened it lazily, marked three items for future reading, then got hooked. Maybe what surprised me even more was that I found a handful of things I could use immediately in my own work. Anna Adams, Senior HR Adviser, As a service provider in the Wealth Management industry our employees are our biggest asset by far. Our success depends on them, so I was delighted to see the work by Human Potential Accounting and the helpful insights provided by the Handbook. Karen Tippleston Leech,
This is a great piece, you have done incredible work. Maxime Le Floc'h,
Id intended to skim, but got hooked. Powerful stuff! But I like my job, so dont quote me. Anonymous Investment Banker
Wow, the e-book looks really fantastic, one of the nicest I have seen, thanks for sharing. I like the format and the 'non-boring' attitude that it has.
A really interesting read.

Open University Lecturer.
Director,
Carol Royal and Loretta ODonnell
Dr Royal and Dr ODonnell are in the unique and enviable position of being both accomplished academics and Certified Investment Advisors. This dual skill set enables them to speak authoritatively on their fieldwork, which has yielded some valuable insights.
After recent corporate collapses, markets and the general public demand to know more about human capital as a key indicator of future value in firms. This incorporates factors such as management quality and leadership. Investors increasingly need to see early warning signs of failure or growth prospects in their investments. For commercial bankers, lending proposals are either accepted or rejected on the basis of set financial ratios, such as debt to equity and loan to valuation. But do these ratios tell the real story of the value which is being created, or destroyed, within a listed company? Is it dangerous for investors to rely on quantitative measures alone? As part of an ongoing research study, we have found that financial information and traditional quantitative analytical tools have not served investors well. The focus is changing from a reliance on lag indicators of past financial performance, to a focus on more contemporary qualitative lead indicators. However, most institutional investors use analytical approaches which do not include systematic analyses of human capital within a listed organisation. Quantitative analysis, by itself, can underestimate the complexities involved in industry sectors. Properties shared by an industry sector may be superficial or may not be material.
Many human capital analytical tools have tried to apply principles from the discipline of accounting to the more complex process of managing people. Some have included: attempts to value people as assets (by applying accounting valuation principles); creating an index of good management practices and relating these to business results; statistics about the composition of the workforce; and measures of the productivity and output of people (Mayo, 2001).
But these kinds of approaches do not analyse the fundamental drivers of human capital in ways which can be readily understood by investors. Investors need to be able to assess whether a firm can deliver on its stated strategy, and whether management systems are internally consistent and consistent with strategy. Institutional investors need to be able to value intangibles like intellectual capital (which can be seen to some extent in data on patents and royalties) but also they need to be able to assess the quality of the underlying human capital which underpins the intellectual capital. Initiatives like the provide incentives to broaden equity research to incorporate themes from good governance principles and strong environmental
management. However, some fund managers, while attempting to capitalise on this emerging mandate, fall into the trap of measuring what they can measure, such as data on health and occupational safety incidents, staff turnover and headcount, rather than analysing what they should measure (Creelman, 2006). Instead, fund managers need to articulate how human capital creates value for investors. One widely used quantitative option pricing model, the Black-SholesMerton (BSM), derived by Nobel Prize winning economists, was used extensively by major financial institutions as they developed finance credit derivatives. Long Term Capital Management (LTCM) used the BSM model because the partners believed in the power of mathematics to illuminate international opportunities for trading. For some years they produced extraordinary returns. But, LTCM collapsed when global markets panicked following the Russian financial crisis of 1998. The trading and pricing models had made markets highly interdependent, but the models themselves had not factored in the potential for crises in human behavior under conditions of unpredictability. In spite of LTCMs massive losses, Merton defended the quant approach, saying that A lot of the problems in structured finance have not been due to too much innovation, but a failure to innovate sufficiently. We agree that there needs to be more innovation in the investment process, starting with clearer analysis of the qualitative elements of value creation, especially human capital. More recently, the inappropriate use of apparently sophisticated financial models, such as David Lis Gaussian Copula function, have created widespread problems for investors. In statistics, a copula is used to couple the behavior of two or more variables. Lis model used inadequate historical pricing data, in ways for which it was never intended, by staff in many divisions of top investment banks. This created widespread mispriced assets with devastating consequences for investors and their clients. In creating his formula, Li had oversimplified the complexities of issues such as real world default statistics. His model was built on the assumption that: The only thing that matters is the final correlation number, one clean, simple, allsufficient figure that sums up everything (Salmon, 2009). But, similar to the Black-Scholes-Merton model, Lis model was incomplete, in spite of its seductive mathematics.
Photo by Eugene Zemlyanskiy CC BY 2.0
, hedge fund manager and author of , criticized Lis model: "People got very excited about the Gaussian Copula because of its mathematical elegance, but the thing never worked Coassociation between securities is not measurable using correlation. Peter Wilmott, a quantitative finance academic and consultant, reported that the relationship between two assets can never be captured by a single scalar quantity. Overly simplistic pricing and trading models fail to incorporate the complexities which underlie the listed firms which are the basis of these investments. It is not possible to sum up human capital dynamics within firms, or in the broader market, with one correlation number. As of his Gaussian Copula formula: "The most dangerous part is when people believe everything coming out of it (Salmon, 2009). But, in the finance industry, where quant analysts have commanded enormous prestige, it is not surprising that some institutional investors focus on the numbers, and become disconnected from the complex reality which the figures are supposed to represent.
Human capital degree-trained professionals can see through the pretense of fund managers bearing human capital investment products. Investor community manage your risks. Human capital professionals are trained specifically in the disciplines which underpin human capital analysis. These skill sets have been developed for use within organisations, in order to enhance financial performance over time.
On the other hand, most finance professionals are trained in a very different set of underlying disciplinary fields. The nominal function is to conduct thorough research investigations into all aspects of the current and prospective financial condition of publicly listed companies and to provide an analysis of the findings in the form of a research report, which serves as a basis for making an investment recommendation (Royal & Althauser, 2003). Recommendations are made on a relative basis comparing a companies performance within a sector or industry and examinations should cover all pertinent publicly available information about the company and its business. It is not limited to financial statements, [and includes] research on the company, industry, product or sector, and public statements by and interviews with executives of the company, its customers and suppliers (Fernandez 2001: 3).
There is a danger of them falling into the trap of measuring what can be measured rather than what should be measured. In this early stage of human capital analysis for investment, investors and trustees need to be aware of the dangers of unscrupulous fund managers who see human capital as the next best thing and engage in superficial aspects and the language of human capital without fully understanding the complexity of systems which drive sustainable value. If a fund manager moves outside their area of professional expertise, whereby they apply human capital metrics to investments in ways for which they were never intended to be used, then, as with the Gaussian Copula experiences, devastating consequences can follow for both the investor community and for the institution which is offering the human capital investment products. Unfortunately, the evidence is becoming apparent amongst institutional investment products. There is potential for this in the ESG investment arena. In terms of the Environmental, Social and Governance aspects of the United Nations Principles for Responsible Investment, it is the social aspects which are least well understood by markets. Environmental issues are increasingly clear to market participants. Governance aspects are becoming more transparent. Social aspects remain somewhat more mysterious. Some ESG fund managers are using singular factors, such as employee engagement scores, as a proxy for all human capital performance. A simplistic grab bag of human capital data is not sufficient to incorporate the human capital complexities which underlie the listed firms which are the basis for these investments.
Over 90% of financial analysts studied in a case analysis of investment banking internationally had degrees in quantitative disciplines, such as econometrics, actuarial economics, engineering and accounting (Royal and Althauser, 2003).
Therefore, fund managers need to recognise that their skill sets differ from those of university-trained human capital professionals.
FUND MANAGERS NEED TO RECOGNISE THAT THEIR SKILL SETS DIFFER FROM THOSE OF UNIVERSITY-TRAINED HUMAN CAPITAL PROFESSIONALS
This is an important distinction.
Even world renowned economists now believe that understanding the financial performance of firms requires a much deeper, more robust, understanding of human behaviour than economists previously admitted (Akerlof and Shiller, 2009). This is not a trivial issue. The same day that Lehman filed for bankruptcy on September 15, 2008, three top credit ratings agencies had rated the investment bank as above average in its ability to meet its financial commitments. Those who tried to articulate the flaws in the underlying management systems were criticised (Swedberg, 2009). Firms like Google recognise this and use qualitative human capital indicators, as well as quantitative models, as a component of the business communication cycle (Girard, 2009). Financial results cannot be predicted precisely, but the human capital patterns shaping them can be understood (Senge, 2000; Edmans, 2011). Quantitative valuation methods are necessary but not sufficient for predicting future value in complex, knowledge based organisations. They need to be supplemented by rigorous qualitative research which incorporates human capital and which factor in the reality of the ebb and flow experienced by firms in changing economic conditions.
The most notable human capital fund manager able to do this well is US based firm, Bassi Investments. Not only were they one of the earliest funds to enter the human capital funds arena, but they are impressive because they have a strong foundation in human capital analytical methods, for internal and external uses. The firm took the time to develop a sound theoretical underpinning to their human capital investment philosophy. They are credible experts in human capital, with an alignment between their professional skill sets and their ability to offer human capital investment products to investors. This expertise cannot be developed overnight, and it is foolish to underestimate it.
able to predict the disaster, no matter how hard he studied the available flight data and metrics. It was a design flaw which caused the disaster. Observers had to look beyond the metrics to ask very fundamental, qualitative, human capital questions, such as, Does it make any sense to have people riding in a gondola, strapped to a giant sack of flammable hydrogen gas? There are no metrics which answer those fundamental questions (Bryan and Rumelt, in Webb, 2009). Needless to say, if that had been an investment in a listed corporation, investors would have been very exposed and the reputation of the fund manager and their investment product would have severely suffered. The same can be applied to the investment process. Investors cant invest in listed companies based purely on metrics. The evidence indicates that very few institutional investors have professional skill sets to assess whether a listed company has appropriate configurations of human capital. Institutional investors really need to analyse whether the listed companies, in which they invest on behalf of the investment community, are capable of withstanding all kinds of weather conditions. Only human capital experts are trained to find those answers.
At the heart of this problem is the overreliance on overly simplistic human capital metrics to provide investment performance, especially when those metrics were designed for internal corporate use.
Some liken this misinterpretation of metrics to the example of the Graf Zeppelin and the Hindenburg in the 1930s. They were as big as the Titanic and were the largest aircraft ever flown. They made 620 successful flights, were considered to be safe. One evening in May 1937, the Hindenburg burst into flames and fell to the ground in New Jersey. No modern day econometrician would have been
NO MODERN DAY ECONOMETRICIAN WOULD HAVE BEEN ABLE TO PREDICT THE DISASTER
Akerlof, G. A. and Shiller, R. J. (2009) Animal Spirits: How Human Psychology Drives the Economy, and why it Matters for Global Capitalism, Princeton University Press, Princeton, New Jersey. Bassi, L. and McMurrer, D. (2010) Human Capital Management Predicts Stock Prices Creelman, D. (2006) Reporting on Human Capital: What the Fortune 100 tells Wall Street about Human Capital Management DVFA (2010) KPIs for ESG, A Guideline for the Integration of ESG into Financial Analysis and Corporate Valuation, Exposure Draft, 3.0. The European Federation of Financial Analysts Societies and Society of Investment Professionals in Germany (DVFA). Frankfurt am Main, April, 2010. Edmans, A. (Forthcoming, 2011) Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices, Journal of Financial Economics Fernandez, F. A. (2001) The Role and Responsibilities of Securities Analysts. Securities Industry Association Research Reports (August): 3-10. Girard. B. (2009) The Google Way: How One Company is Revolutionizing Management as we Know It, No Starch Press, San Francisco. Hubbard, D.W. (2009) The Failure of Risk Management: Why Its Broken and How to Fix It, John Wiley and Sons, New Jersey. Kerr, S. (1975) On the Folly of Rewarding A, While Hoping for B, The Academy of Management Journal, Vol. 18, No. 4 (Dec., 1975), pp. 769-783 Mayo, A. (2001) Measuring Human Capital, Ch. 3 in The Human Value of the Enterprise, Nicholas Brearley Publishing, London, pp 40-70. http://www.nicholasbrealey.com/london/human-value-of-the-enterprisethe.html ODonnell, L. and Royal, C. (2010) The Business Case for Human Capital Metrics. Chapter 6 in: Strategic HRM: Contemporary Issues in the Asia Pacific Region, J. Connell and S. Teo (eds), Tilde University Press, Melbourne. ODonnell, L. (2008) Cognitive Complexity in Board/Market Dialogue in the Biotechnology Industry, The International Journal of Knowledge, Culture and Change Management, Vol. 8 (1), pp. 213-220 The International Journal of Knowledge, Culture and Change Management Royal, C. (2009) "Knowledge Acquisition in Investment Banking: Opportunities for HR Professionals", The International Journal of Knowledge, Culture and Change Management, Volume 8, No. 11, 73-84. Royal, C. and Althauser, R.P. (2003) The Labour Markets of Knowledge Workers: Investment Bankers Careers in the Wake of Corporate Restructuring, Work and Occupations, vol. 30, no. 2, pp. 214-233. http://wox.sagepub.com/content/30/2/214.abstract Royal C. and ODonnell, L. (2008) Emerging Human Capital Analytics for Investment Processes, Journal of Intellectual Capital, Volume 9, No. 3. Salmon, F. (2009) Recipe for Disaster: The Formula that Killed Wall Street, Wired, 23rd February
Swedberg. R. (2009) The Structure of Confidence and the Collapse of Lehman Brothers, Cornell University, Department of Sociology, CSES Working Paper Series, No. 51. November, 2009.
Tett. G. (2009) Fools Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe, Little, Brown, London. Triana, P. (2009) Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?, John Wiley and Sons, New Jersey. Webb, A. (2009) Management lessons from the financial crisis: A conversation with Lowell Bryan and Richard Rumelt, McKinsey Quarterly, June.
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(BA, MCom, PhD) is the Director of the Masters of Technology Management program at the Australian School of Business, University of New South Wales, Sydney, Australia.
Her research evaluates publicly listed companies through human capital analysis and its links to corporate performance, corporate sustainability and human capital and organisational change management systems, qualitative research methodology and human capital analysis in investment and financial markets, and human resource management in professional services. Prior to her consulting and academic roles, she held senior line human resource management positions with the manufacturing and retail sectors and in the stock broking industry.
(BA (Hons), Dip Ed., MBA, PhD) is also at the Australian School of Business, University of New South Wales, where she is the Director of the Master of Commerce program. She began teaching on the AGSM Graduate Certificate in Change Management in 1996. She has been involved in corporate advisory in the public and private sectors, particularly in knowledge intensive arenas.
Prior to her academic role, Loretta consulted within a global consultancy, then within a specialised firm. Loretta took an extended posting to World Headquarters in Chicago, as project manager of an international team of change management consultants to create the firms worldwide change management methodology.
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Heisenberg
Heisenberg is a bit of a maverick. He/she anyway isn't one person/s. The original Boris Heisenberg was the discoverer of the Principle of Uncertainty so it seemed logical that it should be uncertain who his current incarnation might be, especially since it will always be equally uncertain what he/she/they/it may write about next. The only guarantee is that the individual/s is/are known personally to our esteemed Director who vouches for their authenticity as well as sympathising with their desire for anonymity.
Many people ask me how a psychologist came to be working on a trading floor and then in corporate finance. There are three reasons. 1. 2. 3. First, the herd instinct of the markets and the sociable nature of the work seemed to make it a natural choice for a somewhat mercenary, fun-loving psychology graduate who had been told to get industry experience by business psychologists and wanted to pay off a bit of student debt. Second, British degrees have never been that vocational. Finally, I showed some flair about my skiing style in an interview.
I survived and even enjoyed the trading floor. It all struck me as a little reactive and short-termist. Lots of banter, high energy and high stress. An event occurs, predictable mass reaction occurs, companies or even countries broken or propelled into favour on the back of reactionary sentiment. Clients rude to us, us rude to clients: kiss and make up. Tempers flaring, errors outed in public. Our sole goal do the deals that give us the greatest profit margin working within certain given client boundaries (it's a pension fund - can't be too risky). Investors didn't want to know the story behind a company or country they relied on credit rating agency judgement or broad analysts' sentiment. This simplified my job but made it a little dull.
Six months into the job the first round of bonuses were announced. In my performance appraisal I had rated myself with Bs and Cs. My manager told me to re-rate higher as everyone else would give themselves As regardless. A paltry 500 was given to most first year grads in other occupations, which in most circumstances would have made me quite happy. Already highly paid for a graduate, but essentially still learning and riding on the back of a Tier One bank's reputation and money, I soon felt as hard done by as everyone else. I was reassured by more senior colleagues that I deserved a token 10-15 k at the very least. Our graduate programme had all been about technical skill and becoming big swinging dicks, nothing much about deeper purpose, meaning or values. So we whined and we bitched. We talked about moving to the bigger payers. I'm not sure it once occurred to us that the world and the bank didn't owe us a favour, or that most other friends were surviving on a third of the amount. Of my intake about 70% had left within two years to go to other banks or get out.
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Around that time a German paper got a chimp from the Berlin Zoo to pick a stock portfolio. It outperformed the market.
But in its own way it was a little more interesting. I actually considered marginally more information beyond that day's share price and what the Federal Reserve was doing with interest rates. But we certainly were not encouraged to have any deeper sense of values around the client we just had to know more history. However, all non-financial/economic elements were still ignored. It's no small wonder a huge percentage of mergers and acquisitions fail. Hopefully someone else was employed to check the other bits (what the now departed Carly Fiorina of Hewlett Packard called the 'squishy bits'), though much to my chagrin I know many such transactions continue with little or no money put aside for managing change until the change is upon a company. Even then lip service is paid to it. When will senior executives realise that the difficult part is not making an acquisition, but all the 'soft' stuff that follows?
Fourteen year old Jonathan Lebed burst on to the scene in the U.S. He pumped and dumped penny shares, making $800k. Prosecuted by the SEC he paid back $300,000 of the money he had made, but kept half a million dollars. In his defence, he successfully claimed he was only doing what the professionals do every day. Financial publication Barron's seemed to believe that Lebed "adapted standard brokerage house procedure and put out wildly bullish buy recommendations larded with fancy ... what little Jon seemingly wasn't aware of was that only chartered financial analysts are legally entitled to engage in the practice. Research seems to support this dim view of the funds and brokers who play in and move these markets. by the Cass Business School examining the performance of over 1500 UK funds between 1975 and 2002 concluded that only 16 of these performed well because of skill rather than luck. They also demonstrated that the converse is not true badly performing funds generally exhibited poor skill, rather than suffering bad luck.
When once involved in a significant return of capital to shareholders, on the back of the breaking news we proceeded to hawk the idea to practically every corporate client with spare cash on their books. One retail client was prepared to take the idea further if it could be factored into a greedy group of directors' bonus plans. Never mind the fact this was a company desperate for some inward investment. All we cared about was making money. Progress stalled later on in negotiations when it became obvious an employee and shareholder mutiny would be the most likely outcome of this wildly unacceptable cash-draining plan.
After a year or so I was becoming bored. My naturally precocious, assertive style was flourishing and encouraged. I was a gremlin quick, defensive, reactive, all mouth. No different from many colleagues. I decided to try something else in the bank so made the move to Corporate Finance. At first I found it all a little too pedestrian, lacking in the immediate dramas of the trading floor. Where were the screens?
From a personal motivation perspective I knew my days were numbered in banking when I worked on the merger of two engineering companies in the late 1990s. Charged with finalising the financial transaction modelling I became much more interested in how a new outspoken, autocratic American CEO was actually going to be able to work effectively and productively with the newly acquired executive team, who were clearly hostile and 'anti' his proposals. The deal looked good from a 'numbers' perspective primarily advisors' fees and CEO's bonuses though controversy abounded in the press. The merger proceeded. Two years later the CEO 'retired' with a significant cash sum with shares at a nine-year low. Of course all this is some years ago. I'm sure things have changed since then!
Excerpt from www.havingtheircake.com reproduced with permission
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A TRUTH UNIVERSALLY ACKNOWLEDGED
NO AMOUNT OF INTERNAL COMPLIANCE RULES AND CHINESE WALLS CAN AIRBRUSH OUT OF REALITY THE INCONVENIENT TRUTH THAT EXECUTIVES OPERATING FOR THE SAME ULTIMATE PAYMASTER IN THE TRIPLE FUNCTIONS OF CORPORATE ADVISORY, PROPRIETARY TRADING AND EQUITIES RESEARCH CANNOT EVER ACT IN A TRULY INDEPENDENT MANNER FOR THEIR CLIENT. AND, TO MISQUOTE JANE AUSTEN, IT IS A TRUTH UNIVERSALLY ACKNOWLEDGED THAT A BANKER IN POSSESSION OF A GOOD CORPORATE CLIENT (OR INDEED A TRADER IN POSSESSION OF A SIZABLE LONG OR SHORT POSITION) MUST BE IN WANT OF A CO-OPERATIVE RESEARCH ANALYST. IN SHORT, THE DICE ARE LOADED AGAINST INDEPENDENCE AND INTEGRITY IN THE EQUITY RESEARCH DIVISION.
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Michael Reddy
Ive collided with the investment industry twice, once as a serious investor myself (may as well declare an interest), and in my professional role as a psychologist, watching the sometimes (frequently?) uninspiring attempts of businesses to manage their biggest asset. To be fair I have more sympathy with business leaders than may be apparent if only because they are largely hamstrung by the short-termism of the markets, and because you can't seriously put your biggest asset on the balance sheet, not to mention that the only place for people on the venerable P&L is as a cost. Not the best starting point for managing people as an investment. Ive spoken about these inconvenient truths elsewhere so what else might I be doing about it? Oddly enough the place to start is the investment industry itself given that it has come to play host to some inconvenient truths of its own. Many of you already know all of this so please fast forward accordingly. Its helpful to think of the investment industry as a highly efficient (not necessarily effective) precision watch.
The mechanism or movement of this exquisite instrument involves some big wheels. The two biggest are the Pension Funds and the Investment Banks. These are the big wheels, the big beasts (see Diagram 1). The fuel which makes the wheels turn is money. Lovely money. Stuff you can count, stuff you can stack up, stuff you can spend, stuff that makes people salivate, stuff that can get you anything, stuff people kill and kiss for. Although most of it doesnt actually stack up anymore. Only 3% of the money in circulation (coins and notes) stacks up or folds is actually produced by the Bank of England. (See Ben Dysons piece in this ebook and why the Governor of the Bank says that Of all possible banking systems weve got the worst.)
Diagram 1 INVESTMENT BANKS SELL-SIDE ANALYSTS
PENSION FUNDS
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Back to the watch. The Corporates arent part of the mechanism itself of course but they are where most of the money goes (see Diagram 2).
Diagram 2 COMPANIES
DEALS PENSIONS
Diagram 3 COMPANIES INVESTMENT BANKS

FEES DEALS
PENSION FUNDS
INFORMATION
SELL-SIDE ANALYSTS
PENSIONS MANDATE + CONTRIBUTIONS
INFORMATION
INVESTMENT BANKS
Pension Funds pour something like 60% of the money that goes into all the businesses that in turn make the world go round, whether by buying their shares or by providing finance via e.g. private equity directly, or indirectly via funds. Im including with the Pension Funds all those other institutions that collect contributions from many subscribers and members insurance funds, university endowment funds, unit trusts, hedge funds, and so on. Thats how Wall St dominates Main St.
The other big wheel that (a) also puts a large proportion of money into the system, and (b) even more importantly, along with the Pension Funds fund managers largely determines where the money goes is the Investment Banks. The decisions may be made here through the Banks Corporate Finance Division, Wealth Management Division, or Private Equity Division (see Diagram 3).
PENSION FUNDS
INFORMATION
SELL-SIDE ANALYSTS
INVESTMENT CONSULTANTS
INVESTMENT MANAGERS
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You will see that I have Sell Side analysts overlapping with Investment banks because in many cases the brokerages they work for are part of an integrated Investment Bank. More importantly they act as the starting motor that sets the whole mechanism in motion. One last glance at our precision watch (see Diagram 4, the full picture) shows one or two of the other cogs among the big wheels and also shows what happens when the sell side analysts press the button and the wheels begin to turn. Impressive, isn't it. A precision watch in top gear. perfect
Diagram 4
COMPANIES
PENSIONS DEALS
MANDATE + CONTRIBUTIONS
FEES
INFORMATION
PENSION FUNDS
INFORMATION
INVESTMENT BANKS SELL-SIDE ANALYSTS
Question: does it tell the time? And who wants to know?

FEES
RETURNS INFORMATION FEES ADVICE MANDATE + FEES INFORMATION BROKERING
Well, the regulatory bodies like to know, the Bank of England has a keen interest, the credit rating agencies have some influence on it, M&A and Private Equity teams ought to have an interest in it. They may each have a different lens on what happens but together their scrutiny is critical to the future of investing. Certainly the Capital Markets and especially the retail banks have an interest if only because they do most of their lending to it, rather than to SMEs. (Easier to manage the risk, richer pickings.)
INVESTMENT CONSULTANTS
SELECTION
INVESTMENT MANAGERS
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Clearly it doesn't.
If money is best spent investing in sustainable businesses, businesses that are reliably going to be successful in the long term, investors need to identify those companies that best manage their brand, show a rising share price, carry a strong line of credit, benchmark well in their sector, and are clever in the ever revolving M&A market then one would have to say that the investment industry knows very little about the one single component that has most to do with the success of any business its people. I mean its people as a whole, not just the CEO or the Board, which is about as far as most due diligence goes in any acquisition. People are the sole remaining source of competitive advantage in any market where technological advantages and access to resources can quickly be overtaken. Take any one of the factors above say brand management and ask what makes the difference for good and ill? Ultimately the answer will always include the behaviour of people, the most difficult ingredient to measure, the most varied, volatile and least predictable element in the mix. It is not therefore unsurprising that to the typical equity analyst human behaviour is largely an unknown quantity, the soft stuff that is impossible to quantify (and therefore irrelevant?) What to the analyst is uniquely relevant is the evidence of the balance sheet (which is however past its shelf life in a knowledge economy in terms of its ability to value its biggest asset) and a set of computer generated algorithms pointing to future earnings. To me as a psychologist, human behaviour that to the analyst is the soft stuff, is as hard as it gets; to me it is a lot harder than accounting figures that bear only rear view mirror witness, and well tested ways of accounting for material costs. Soft or not, observable and measurable data exists in every organisation that can be interrogated to answer questions such as: How well are you managing your talent ... your people risks ... your well being proposition to employees ... your leadership role? Thats enough to put some hard edges on the soft stuff, and is the line taken consistently through HPAs publishing, research and audit activities. We will be reporting back through the website in due course for those interested.
THE ANSWER WILL ALWAYS INCLUDE THE BEHAVIOUR OF PEOPLE, THE MOST DIFFICULT INGREDIENT TO MEASURE, THE MOST VARIED, VOLATILE AND LEAST PREDICTABLE ELEMENT IN THE MIX. TO ME AS A PSYCHOLOGIST, HUMAN BEHAVIOUR IS AS HARD AS IT GETS; IT IS A LOT HARDER THAN ACCOUNTING FIGURES THAT BEAR ONLY REAR VIEW MIRROR WITNESS AND WELL TESTED WAYS OF ACCOUNTING FOR MATERIAL COSTS.
About the Author Best known as the Founder and former Executive Chairman of ICAS, which he ran for 20 years and brought to international status with 17 offices overseas, Michael is a Chartered Clinical and Occupational Psychologist, an Associate Fellow of the British Psychological Society and a Fellow of the RSA. He is the founder of human capital consultancy, Human Potential Accounting.
Acknowledgement: we thank Maxime Le Floch, who first drew the watch for us.
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Howard Marks
HubCap reads anything and everything that Howard Marks writes as does Warren Buffet, so were in good company. Howard Marks is Chairman of Oaktree Capital Management L.P., a global investment management firm which specializes in less efficient and alternative markets. The firm was founded in 1995 and is headquartered in Los Angeles. It has offices in 13 cities in 10 countries with over 600 employees globally. HubCap reads him because he has an unparalleled overview and ability to write about whats happening across the whole investment market. His collected Notes would make a fascinating textbook. Here he happens to be talking about regulation. As usual he knows what hes talking about, makes sense, has been round the block more than once, and has a handy touch with language especially metaphor, though thats less in evidence here.
In the 3 years since the financial crisis surfaced in July 2007, there has been extensive discussion of the part deregulation played in creating it, as well as the need for increased regulation to prevent the next one. The release last month of the reawakened the debate. Thus Im often asked nowadays how I feel about regulation and what I think the future holds in that regard.
In particular, according to Pecora, disclosure standards were nonexistent.
Ive written before that attitudes toward regulation follow the same pendulum-like swing as most other aspects of market behavior. They oscillate not only in response to events in the economic environment, but also because neither total regulation nor total deregulation produces an entirely satisfactory answer. As in so many things, theres no perfect solution. A great source on the subject is Wall Street Under Oath, a 1939 book on the causes of the Great Crash of 1929 written by Ferdinand Pecora, who was counsel to the Senate Committee investigating the crash and later a New York State judge. I first read it about twenty years ago, and I brought it out of storage in 2007. It is a typical polemic, assigning blame and touting regulation pursuant to what I assume were the authors philosophical/political biases (see under "The Origin of Attitudes", below). Pecora describes a Wall Street that, up to and including the 1920s, was like the Wild West. Bankers and brokers were out to make money for themselves; their behavior was largely unregulated; and conflicts between their interests and those of their clients were widespread and disregarded.
These facts combined with other causes to produce a market crash of epic proportions; widespread losses; a drying up of capital; deflation; and a massive depression with a resulting increase in unemployment to 25%. Unsurprisingly, fingers were pointed at the prior administration, and political power shifted to believers in an activist role for government. The most lasting result was the enactment of laws that governed the financial system for decades and in many cases still do: the Securities Act, the Securities and Exchange Act, and the Glass-Steagall Act. Thus the 1930s saw a massive swing of the pendulum in favor of regulation.
The next several decades on Wall Street were perhaps thanks to the impact of those laws a relatively placid period. This led to a view that, with rare exceptions, market participants are well-behaved by nature. Further, steady growth with only moderate dips caused a perception of an inherently benign and productive economy that could achieve even more if only the regulatory shackles were loosened. After President Carter deregulated the transportation industry in the late 1970s, the door was open for much of the regulatory apparatus built in the early part of the century to be relaxed. Ronald Reagan, whose famously free-market views coincided with a period of peace and prosperity, led the deregulatory charge. We saw a similar turn in Britain under the leadership of Margaret Thatcher; the collapse of the USSR and a resounding victory for capitalism; and the ascendance of free market adherents Alan Greenspan and George W. Bush.
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With the economy and financial system generating prosperity, people wanted more of the same. And with manufacturing in decline, we relied heavily on the financial sector for an increased contribution to GDP, job creation and standards of living. The prevailing view was that the less regulation we had, the more productive business and finance could be. And what was there to be feared from an unregulated economy, anyway? The result in the past decade, according to a great newspaper quote that sadly I cant locate, was the kind of regulation you get from an administration that doesnt believe in regulation. Thus, coming full circle from the 1930s, starting in 1999 we saw revocation of Glass-Steagall; elimination of the up-tick rule limiting short sales to instances when stock prices were rising; a pivotal decision to exempt derivatives from regulation; increased permitted leverage at investment banks; and starvation of regulatory agency budgets. These developments were followed by the global financial crisis of 2007-08. Coincidence or causality?
On the other hand, regulation is too imperfect to be relied on. (Thanks to Soggy Sweat for this dialectical approach see my memo , December 17, 2010.) Its easy to write hard-and-fast rules, but rules sometimes impose undue costs or restrict activity in undesirable ways. And their specificity often makes them capable of being circumvented. Because financial institutions are intent on innovation, rules rarely keep pace and regulators usually find themselves playing catch-up. Rule-writing is reactive: rules are written in response to the last problem, not to foresee and prevent the next one, which invariably is different. In addition, regulators lack the financial motivation that drives those who can profit from getting around regulations and exploiting loopholes.
The free-market capitalist system runs on self interest and the desire for profit. We need regulation to ensure those things are kept within reasonable limits. Thus the goals of financial regulation are roughly as follows: to limit risk, especially risk to the overall financial system to restrict the concentration of economic power to protect customers, especially the little guy to prevent error, fraud, misrepresentation and theft, and to democratize finance and make it a tool of social policy.
Since rules become outdated and circumvented, it might be preferable to regulate through principles. In other words, rather than numerical limits and defined borders, regulations might be written in general terms to produce adherence to ideals and policy goals. But regulating this way requires that judgments be made, and regulators are rarely accorded the license required for judgment-making. Imagine the second-guessing, legal appeals and phone calls to congressmen that would follow an individual regulators decision that a financial institutions actions have violated vague principles ... especially during a halcyon period when the warned-of consequences are slow in coming. Principle-based regulation requires not only flexibility that is hard to build into and nurture in bureaucracies, but also significant business acumen, perspicacity and foresight. The evidence is prima facie: very few people saw the risk posed by sub-prime mortgages and structured mortgage products, and certainly not the regulators. And no one I know of regulator or otherwise foresaw the effect these things would have on banks, money market funds and the commercial paper market.
Why didnt regulators say a word about rating agencies dispensing many thousands of triple-A ratings to structured mortgage vehicles? Why were the highly regulated banks ground zero for the consequences of the financial crisis, while unregulated hedge funds were relatively unscathed? I just cant imagine that regulators will ever have the ability to fully anticipate the consequences of changes in the fast-developing financial system, or to foresee the development of new problems for which rules and responses have yet to be drawn up.
If ethics, self-regulation, personal responsibility, respect for risk and a sense of limits could be counted on, we wouldnt need much in the way of regulation. But, sadly, they cant. Since the profit motive can lead financial institutions to aggressive risk taking, error and even misdeeds, regulation is counted on to prevent these things. Theres also concern that individuals self-interest might drive them to actions that collectively might injure their companies and society.
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Heres how Peter Sands, chief executive of Standard Chartered, was quoted in the of January 26 2011:
It is not clear why some regulators who were there before the crisis should believe they now have all the right solutions. What regulator would have been able to make a difference in protecting our financial institutions (and the overall economy) from the developments of 2004-07? And given how valuable his skills would be in the private sector, how long would he have remained a regulator? No, it just doesnt make sense to expect government employees to safeguard the financial system. The conclusion is inescapable: responsibility for the safety of the financial system cant be delegated to regulators.
most peoples attitudes toward regulation stem far more from upbringing and circumstances than from analytical and intellectual processes. Attitudes toward regulation, like politics, are largely hereditary and change slowly if at all.
Its my belief that because both free markets and regulation are imperfect and because of the strength of peoples political and philosophical biases we will never settle permanently on either a completely free market or a thoroughly regulated system. Any position will prove merely temporary, and the pendulum will continue to swing toward one end of the spectrum and then back toward the other. Scandals and crashes will cause a cry for regulation. Regulation will curb the excesses and punish the wrongdoers, discouraging repetition. The environment will calm, and economic progress will become the rule. Memory of the events behind the demand for regulation will fade. Free-marketeers will gain sway, and theyll argue that we could do even better if the system were deregulated. Regulation will be eased. Risk-taking and misdeeds will rise. Scandals and crashes will occur anew. Pro-regulation forces will regain influence, and free-marketeers will be in the doghouse. And the pendulum will swing back toward regulation.
In my memo of December 2010 I wrote of gold that its like religion: either you believe in it or you dont. I think something very similar can be said about regulation of business and the economy. Liberals who champion an expanded role for government tend to be pro-regulation, while conservatives favoring laissez-faire policies and limitations on government will argue against it with vehemence. Democrats generally like an activist government: thats what makes them Democrats. Republicans dont. Those partaking in the benefits of economic growth tend to favor free markets and oppose further regulation, since theyre happy with things the way they are.
Free markets do a great job of allocating economic resources especially on average over the long run but the interim fluctuations produced by miscalculation can be intolerable and have to be modulated. This makes regulation indispensable. Bottom line: the financial system cant be entrusted to untrammeled free markets. The reverse is true for those who are failing to participate and those working in the public sector ... although there are millions of exceptions on both sides. Business people who trust the economy to perform for them generally oppose regulation, while members of labor want it to prevent their being taken advantage of by management and the owners of capital. I think our attitudes in this regard are highly correlated with those of our parents and largely a function of the time and place we grew up in. They can be altered through exposure to opposing points of view, but I think
There will never be total, lasting agreement on either complete regulation or totally free markets. Importantly, however, it might well be the case that compromise between the two has the most dangerous consequences. In the decade leading up to the crisis, politics favored home ownership and liberal mortgage availability. These forces, combined with unregulated mortgage securities markets, gave rise to excessive lending, exaggerated demand for mortgage securities (given the illusion of safety), and thus artificially low mortgage rates and loose terms.
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Which bailout recipients remain the biggest sinkholes, without any real chance of repaying the governments investment? The answer is Fannie Mae and Freddie Mac, the government-created mortgage agencies: supposedly private enterprises whose operations were distorted by a tacit federal guarantee. They engaged in uneconomic behavior, advancing the policy goal of making home ownership available to people who couldnt afford it, and accepting vast risk on the basis of inadequate capital because they (and their lenders) had no fear of loss. Legislators turned regulation over to the private sector by putting credit rating agencies in charge of financial institutions investing standards, giving commercial organizations excessive imprimatur. Financial temptation pressured them to drop their standards, and when they succumbed, the previously sacrosanct triple-A rating became a meaningless label.
toward regulation for their limitations to be manifest. One of the primary components of last years new financial reform law was the so-called Volcker Rule, under which banks can no longer risk their capital on trading and investing for their own account. The bankers I meet with rail against the extent to which this will interfere with their ability to serve their customers and lay off risk. They further complain that actions inherent in market-making can be hard to distinguish from Volcker Rule violations. Where do positions held for trading and hedging stop and proprietary trading start? Think about Goldman Sachss bets against subprime mortgages: Did they hedge Goldmans long positions in mortgages? Did they lessen the risk in Goldmans overall portfolio? Were they bets against Goldmans clients? Or did they enable Goldman to take positions that served its clients and otherwise engage in client facilitation?
Having witnessed the rescue of the banks and the financial system, we now have a system where free-market rewards will continue to motivate risk taking and no one believes the ultimate price meltdown will be demanded of too-big-to-fail institutions that take it too far. A free-market mechanism undercut by moral hazard may perform adequately 95% of the time, but it will pose terrible risks in the remainder.
Id guess the answer is all of the above. Clearly, however, a market maker can do far more to provide liquidity if it is allowed to hedge through offsetting positions. Mortgage shorts also shored up Goldmans finances and made it one of the least needy financial institutions. Which would we like to have more of, Goldman Sachs or Lehman Brothers, which plunged into mortgages and derivatives without significant risk control and consequently went bankrupt? And yet Goldmans actions have been vilified and proprietary investing has been outlawed. On February 6 2011, a front-page story indicated how difficult it is to rein in free-market forces and self-interest. Although Washington pushed financial institutions to compensate executives through stock grants in order to align interests with shareholders (and mandated it at the very top), the article described non-mandated employees success in hedging their shareholdings and thus sidestepping exposure to the risks affecting their companies: Wall Street is saying it is reforming itself by granting stock to executives and exposing them to the long-term risk of that investment, said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. Hedging the risk can substantially undo that reform. More broadly, critics say, the practice of hedging represents another end run around financial reform.
Think about the last few years: the depth of the financial crisis, the pain it caused, the blunders (or worse) that were behind the crisis, the financial sector bailouts it necessitated, and the acrimony they elicited from a Main Street feeling left to fend for itself. Then add in a White House and Congress controlled by Democrats, with their leaning toward government involvement in the economy. Certainly this was a formula for a powerful upswing in regulation. In this context, Im surprised that we havent seen much more government activism. The new financial regulations are mild and constrained, in my opinion. Increases in financial institution capital requirements and controls over executive compensation have generally been more moderate in the U.S. than in Europe. No one has gone to jail (or even been subjected to heavy fines) as in the Enron/Adelphia era. And there have been no punitive increases in taxes on the rich. And yet there have been enough steps
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For example, new rules that cracked down on debit card fees have led several big banks to eliminate free checking. Firms also plan to make up missing revenue by adapting their businesses to the tougher new regulations on derivatives and trading with the banks own capital. The of February 7 2011 provided another example:
be bumpy by necessity and some of societys goals will go unfulfilled. Of course, those who favor limits on government involvement in business argue that financial and market regulation shouldnt be a vehicle for implementing social policy. The collapse of the USSR shows the limits of a thoroughly controlled economy. On the other hand, its likely that Chinas impressive accomplishments over the last decade have been aided by the fact that its economy is controlled, such that the movement of resources can be centrally mandated in the short run. Chinas purposefulness is impressive, and China likely would have accomplished less if it had to work entirely through free-market forces. Would we trade our system (and results) for theirs? Will our answer be the same in twenty years? And will China remain the same, or once the highly regulated system has raised standards of living, will people insist on freer markets as well? The debate will inevitably go on: What system is most likely to produce the results we seek? In the last few years weve seen calls for regulations to require prudent mortgage lending and prevent excessive compensation. What system is best able to define these amorphous terms and produce these results? How will economic goals be integrated and balanced with societys other priorities, and should they be? How will laissez-faire economics and financial regulation coexist, and what will be the consequences?
In November, Barclays PLC quietly changed the legal classification of the U.K. banks main subsidiary in the U.S. so that the unit would no longer be subject to federal bank capital requirements.... The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies. Its just not worth it to have all that capital trapped in the holding company, said a New York lawyer who is advising banks on how to restructure. The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world. The article went on to illustrate how a patchwork system can be evaded through regulator-shopping. By deregistering its subsidiary as a bankholding company, Barclays escaped regulation by the Federal Reserve Bank, which would insist on greater capital. Instead its units now fall under the FDIC and the SEC, which will impose no such requirement. The bottom line as far as Im concerned is that you can enact a law or rule and tell business people precisely what to do, but you cant make the economy or companies comply with policies and social aims. Regulations are limited in their scope and effect, and like a balloon, when you push in one place, self-interested behavior pops out in another. As these articles indicate, those who enact regulation sometimes get it right at first glance, but theyre rarely able to anticipate and control the response of those being regulated or the second-order consequences of the rules. Errors and misdeeds will occur as long as imperfect, self-interested humans stray into excessive risk-taking. And as long as these things lead to bubbles and resulting crashes, the willingness to dispense with regulation and rely on free markets will never be complete, regardless of regulations limitations. I believe a free market is the best decision maker, causing financial resources, labor and intellectual capital to flow where they are most valuable and thus have the potential to be best rewarded. But the ride will
These questions will never be answered conclusively. The swing of the pendulum will continue unabated. About the Author Howard Marks is Chairman, Oaktree Capital Management L.P. He has recently published a book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia University Press, May 1, 2011).
This piece was originally a Memo to Oaktree Clients, March 2, 2011, and is reproduced here with permission from Oaktree.
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Become Investor Literate

For HR professionals to deliver intangible value, they must first learn who the investors are and why they are investing in their organization. Let us suggest an investor literacy test: Who are your five major shareholders? And how much of you do they each own? Why do they own you? What are their investing criteria (e.g., dividend stock, growth stock, etc.) What is your P/E ratio for the last decade and how does it compare to your industry average and to the firm with the highest P/E ratio in your industry? Who are the top analysts who follow your industry? How do they view your company vs. your competitor(s)? How are you including key investors and analysts in the design and delivery of your HR practices? (e.g., succession planning, leadership development, reward and recognition) How well does your board govern itself, not just on the Institutional Shareholder Service criteria, but on the process for good board governance? To date, we have found few senior HR executives who can answer all of these questions. Yet, these questions form the base of knowledge that enable HR professionals to link their work to investors.
excerpt from Human Resources New ROI: Return on Intangibles by Dave Ulrich and Norm Smallwood prepared for The Future of Human Resource Management and reproduced with permission
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Ben Dyson
Ben has spent the last 4 years figuring out whats wrong with the banking system. HubCap first met Ben at a finance orientated networking event and became intrigued by his proposition and campaign. Ben and Positive Money are a relatively new and refreshing presence in the Human Capital field and this piece gives us further insight into his proposition and the reasoning behind it.
Despite the tens of millions of words written about the financial crisis, one aspect of modern banking has gone completely unquestioned. Worryingly, it's the one aspect that could be a real threat to business. To understand why, we need to look at money. Specifically, where it comes from and how it's used. It's a question that few people ever ask: Where does money come from? As the old adage goes, it certainly doesn't grow on trees. However, most people would hazard a guess that it comes from the Bank of England, or the Royal Mint, or some other part of the national government. They'd be wrong. Only a tiny proportion of all the money in the UK economy was actually created by the UK government in the form of paper notes and metal coins. With the digitisation of payment systems (think of debit cards, electronic bank transfers and internet banking), the vast majority of money is now electronic. Just numbers in computer systems run by the high-street banks. This electronic money makes up 97% of the money circulating in society, while just 3% is made up of physical cash. No bad thing, of course electronic money is convenient for everyone, and few people would want to receive their salary in bundles of 10 notes. But the problem comes when we look at how this electronic money is created. The reality is that the electronic 'money' that the entire economy runs on was not created by the Bank of England or any part of the government. It was created by the high-street banks as they made loans to businesses and members of the public. The process is described by Martin Wolf, Chief Economist of the Financial Times and one of the five panel members of the Independent Commission on Banking, when he says that
the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks often foolish lending." (FT, 9th November 2010). So the numbers in bank accounts do not represent piles of physical cash in the vaults of banks. They do not even represent electronic equivalents of pound coins at the Bank of England. They are simply accounting entries that were typed into a bank's computer systems when somebody took a loan from that bank. But it is these accounting entries that the businesses and individuals of the UK use to make payments. Very little can happen if your bank balance is zero, which means that we are dependent on the existence of this electronic, bank-created money in order for the economy to keep ticking over. This is where it starts to become a potential threat to business. If most money is created by banks when they make loans, then the amount of money in the UK economy is determined by how much banks lend. This means that the health of the economy depends almost entirely on the psychological state of those at the head offices of Britain's largest banks. If the banks are feeling particularly confident and short-term incentive schemes encourage risk taking, then the banks will lend too much, leading to a huge housing and property bubble, massive overindebtedness, and an economy that appears to be 'booming', albeit entirely unsustainably. The boom of the last decade was caused not by any real growth in productivity, but by the fact that banks were able to double the money supply of the nation in just 7 years (between 2000 and 2007). Of course, since all this newly created money is produced when somebody goes into debt, this doubling of the money supply was tied to a doubling of the level of personal and corporate debt. As we saw, this debt became unsustainable for many households, whose defaults became the first domino in a long line that triggered the financial crisis.
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This doesn't sound like a recipe for a stable economy. It is hardly the best environment in which to grow a strong and healthy business. If we were to design this system from scratch, we would be unlikely to place the responsibility for creating money and making sure the economy has the right level of money to run smoothly, in the hands of people whose incentives will only ever lead them to create more and more money (through lending), right up to the point where it causes a financial crisis. There's another implication for businesses: shortfall of tax revenue to the Government, made up by the taxpayer all of us. How does that work? When the Bank of England prints 5 or 10 notes, it sells them to high-street banks at face value. But because the notes only cost a few pence each to print, there's a sizeable profit made on each bank note. Between 2000 and 2009, this profit added up to 18 billion, and was paid directly over to the Treasury, saving the public 18 billion in taxes. However, because the Bank of England (and the government) has left the responsibility for creating digital money to the high-street banks, they have forsaken the profit that comes from creating digital money. When the banks created 176 billion in 2007 alone (according to Bank of England figures), the government effectively lost out on the use of this 176 billion, and therefore had to collect an extra 176 billion from the public and businesses through higher taxes. All in all, the total amount of money created in the last decade would have comfortably paid for a 30% reduction in the overall tax burden. That may be overstating it slightly, as it would have been reckless to create money at the rate that the high-street banks have been doing, but it's likely that business taxes could be cut by at least 10% if the Bank of England were to reclaim the exclusive right to create new money. So it seems that banking has lost its way of late. Rather than channelling funds to entrepreneurs and helping businesses to grow the economy, the banks are now fuelling the economic chaos that makes it so hard to grow a business sustainably, whilst at the same time benefiting from legal privileges and taxpayer support that no other industry could dream of. A few simple changes to the core business model used by bankers could stabilise the economy and create a much better business environment. (These changes are outlined at ). The real question that we should be asking is: Who should create our nation's money? Short-term profit-seeking banks? Or an independent state agency concerned with the overall health of the economy? The success of Britain's non-financial sector depends on the authorities addressing this question in the months ahead.
About the Author Ben Dyson is a specialist in money and banking. He has spent 4 years researching and identifying the flaws in fractional reserve banking the current business model used by banks globally and getting an understanding of the wider impacts of this business model on the economy and society as a whole. He now spends his time working on the Positive Money campaign, spreading awareness of the problem among MPs, think tanks, charities, academics and unions. Ben has also worked on proposals and draft legislation that would apply Irving Fisher's full-reserve banking solution to a modern, digital-age banking system. He has spoken in both the UK and the US.
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The following is an excerpt from the executive summary of the report from a powerful piece of research, conducted for the CIPD by Dr Zella King of Henley Business School with My-Linh Ngo of Henderson Global Investors. We could have just highlighted the whole report, but you can access it .
Investors views of human capital are changing in a positive direction and they are using more information to inform their decisions. However, this change is slow and human capital information is most likely to be considered under the environmental, social and governance (ESG) umbrella. There is agreement that people and people management make a difference to performance, and therefore the quality of people management is potentially a leading indicator. The most valued information comes from personal contact rather than published reports, and aggregated benchmark data is likely to be trusted more than company data. There is growing awareness of the effects of environmental, social and governance factors (including human capital) on long-term sustainability. Analysts are aware that people management is material to business performance, and increasingly are assessing this in terms of risk to the business. Leadership and long-term structural trends such as skills constraints were deemed important drivers of sustainable performance. However, issues such as engagement, shared purpose or alignment were seen more in terms of a means to implement drivers of performance, such as customer service or innovation, rather than as drivers in themselves.
Our practitioners in general supported these key messages. They felt that businesses need to up the quality and quantity of their external reporting if they are to meet the current and future needs of external stakeholders, including investors, for information that would give an accurate picture of likely future performance: They believe that demand for human capital information by external stakeholders, primarily investors, is growing slowly and being driven by the thirst for such information from investors interested in SRI (sustainable responsible investment). They agree that they have a role to play in identifying and communicating information that is meaningful, rooted in context, accompanied by sufficient explanatory narrative and clearly linked to outcome performance measures. They felt that a framework of risk and opportunity might provide the most appropriate vehicle for communicating human capital in a meaningful way. They felt there are some skills issues around the capability of HR to manipulate data in a way that would address the challenges of reporting and meet the needs of stakeholders. They believe that the CIPD has a role to play in developing a narrative reporting framework that could help employers improve how they use and report on people management and human capital information and help themselves and investors understand the people drivers of sustainable business success.
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Eric Flamholtz
If 2011 is the year when analytics came of age, thanks to Eric Flamholtz, it will also be remembered as the year when corporate culture was recognised as not just a source of competitive advantage, but the ultimate source of true sustainable competitive advantage.
During the past few decades, the term corporate culture has become widely used in business. It is now well recognized that corporate culture is a significant aspect of organizational health and performance. 2
Although there are many different definitions of the concept of Corporate Culture, the central notion is that culture relates to core organizational values. All organizations regardless of size have cultures which influence the way people behave in a variety of areas, such as treatment of customers, standards of performance, innovation, etc.
Strong culture companies can be either positive (an asset) or negative (a liability). If the companys values are constructive and support its goals, then having a strong culture is an asset. We define this as a functional culture. If the companys values are negative or dysfunctional, then having a strong culture will be a liability. We define this as a dysfunctional culture.
Companies where there is a clearly defined culture, where the company invests time in communicating and reinforcing this culture, and where all employees are behaving in ways consistent with this culture, are defined as having strong cultures. 3 A strong culture is one that people clearly understand and can articulate. 4 A weak culture is one that employees have difficulty defining, understanding, or explaining. The culture may not have been defined and/or it is not being actively managed. As a result, employees are left to interpret the companys values for themselves and this sometimes results in the company having not one, but many different cultures.
Culture can impact financial performance, so that a culture can truly be an asset in the technical accounting sense of things of value owned or controlled. To see this, compare the performance of Walmart with its (at least on the surface) identical competitor K-Mart. There is virtually no product that Walmart has that K-Mart does not have; they have the same kinds of stores and they operate in similar locations. They market to the same customers and recruit from the same pool of people. Yet in spite of these similarities, one of them (Walmart) has produced a vastly better financial result for investors than the other. Examining the financial returns to investors measured in terms of stock prices, we see a very clear story of the different performance of Walmart
1. 2.
This summary is based upon: Eric G. Flamholtz and Yvonne Randle, , Stanford University Press, 2011, Chapter 1. See Siehl, C. and Martin, J. Organizational Culture: A Key to Financial Performance? In Schneider, B (Ed.) Organizational Climate and Culture, San Francisco, Jossey-Bass, 1990, pp. 241-281; Kotter, J. and Heskitt, J (1992), Corporate Culture and Performance, New York, NY: The Free Press.
3. 4.
Saffold, G. III Culture Traits, Strength, and Organizational Performance, Academy of Management Review, 13, 1988, 546-558. Strong cultures can be either positive or negative.
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and K-Mart. For the decade of the 1990s, the stock price of K-Mart almost doubled. An original investment of $10,000 would have been worth almost $20,000 by 1999. During the same period, the stock price of Walmart increased several-fold. An investor who made an original investment of $10,000 in 1990 would have seen the value of that investment increase to approximately $280,000! This is an astounding difference, especially when these companies are not like Microsoft or Amgen, where there is proprietary intellectual property. These companies (Walmart and K-Mart) are selling essentially the same commodities, but with vastly different results. If we continue our analysis to the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his or her investment. While Walmarts stock price did decline as a result of the market collapse in 1999-2003, the original investment of $10,000 would still have been worth just under $200,000. In brief, there are no real differences between Walmart and K-Mart except in their management and culture. And the key difference is the intangible but real asset of Walmart: its corporate culture!
THE FACT THAT IT IS RELATIVELY INVISIBLE TO OBSERVERS MAKES CORPORATE CULTURE FUNCTION AS A STEALTH COMPETITIVE WEAPON
About the Author Dr. Eric Flamholtz, who co-founded in 1978, has focused his career on two fundamental questions: What does it take to continue to build successful organizations over the long term?; and What is required for managers to continue to be successful throughout their careers? Answering these questions led Dr. Flamholtz to develop a series of frameworks and management tools that enable organizations and individuals to transition successfully from one stage of development to the next. Eric has helped hundreds of organizations make successful transitions at different stages of growth and development. His clients have included some very large organizations, many of them household names across the world. Dr. Flamholtz serves as a Professor of Management at the Anderson Graduate School of Management, University of California, Los Angeles. He has also served on the faculties of Columbia University and the University of Michigan. A recognized authority in the field of organizational management and development, he has authored several widely read books, including the recent which he kindly summarised here.
In the first empirical research study of its kind, Flamholtz found that culture can account for as much as 46% of EBIT (Earnings Before Interest and Taxes). 5 The intent of his study was to determine whether corporate culture has a significant impact on financial performance. 6
Another implication of the analysis of Walmart and K-Mart is that culture is a true strategic asset, a source of competitive advantage. 7,8,9 Most of the things over which organizations compete can be copied or neutralized by competition. Products can be imitated or improved upon. Financial resources are fungible and most companies have capable people. However, corporate culture is not easily replicated. Corporate culture is then not just a source of competitive advantage; it might actually be the ultimate source of true sustainable competitive advantage. This is because of the extreme difficulties of replicating culture across organizations. In addition, the fact that it is relatively invisible to observers makes it function as a stealth competitive weapon.
6.
7. 8. 9.
5.
Flamholtz, E. (2001). Corporate Culture and the Bottom Line. European Management Journal, 19 (3), 268275.
Although there are several potential measures of financial performance that might be used (such as ROI, EVA (Economic Value Added), cash flow, etc), this particular study used EBIT because that was the performance measure actually used to evaluate and rank the divisions on a monthly basis in this company. This is consistent with the resource based view of strategy (see Barney, 1991,and Dierickx & Cool, 1989). Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal Of Management, 17(1): 99120 Dierickx, I. & Cool, K. 1989. Asset Stock Accumulation and Sustainability of Competitive Advantage. Management Science, 35(12): 1504-1511
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Michael Walton
Michael Walton has written and researched extensively on the subject of toxic management. He is not just knowledgeable about toxic managers, he even has some sympathy with the way they can be sucked into toxic behaviour by the context, environment and seduction of their role.
The competitive nature of business life, the inherent frailty and vulnerabilities of being human and the complexities of life within socially constructed organisations generate emotional dynamics that inevitably create toxic and dysfunctional leadership behaviour. This short article introduces a few points about such matters and suggests we might better prepare and plan for such toxicity, seeing it as an unwelcome but ever present facet of business life.
executives and lead them to become behaviourally dysfunctional. Furthermore organisations, from experience and without wishing to be overly pessimistic, are inherently toxic and punctuated by vested interests, hidden agendas, competing alliances and personal objectives (Walton, 2008:11). We should perhaps expect rather than be surprised at profound leadership dysfunctionality, and even prepare and plan for it.
I was brought up to trust in the integrity and competence of those in positions of organisational power and influence. After all, I surmised, that is why they had been placed in such positions of responsibility and why we have leaders in the first place to be our personal custodians, and to exercise careful and diligent management of the organisation itself. Over the years, tempered by experience and study, my arguably nave trust in leaders and the supposed logical-rational nature of organisational life has been replaced by a more measured and reflective perception of leadership behaviour and of organisational management in general. Now whilst most colleagues may well operate ethically, collegially and collaboratively most of the time, my experience suggests that organisations are also peppered with individuals primarily focused on carrying through their own agendas, come what may. I have therefore come to expect that the behaviour of leaders will oscillate between the predominantly functional and the marginally dysfunctional, depending on context, the situation and the psychological predispositions of the individual leader.
If employees are indeed our most important asset it seems contradictory that employees should be managed more as a cost. I also question why until and indeed after the fall-out surrounding episodes such as the Enron debacle and the sub-prime scandals so little priority attention has been given to questioning the people leadership behaviour of senior executives. It should not be forgotten that business organisations, as essentially political entities, come complete with internal rivalries & tensions, power plays and often ego-centric personalities intent on enhancing their reputations and leaving a legacy for others to follow if not admire. Leadership continues to be presented as essentially a logical-rational, positive and unproblematic phenomenon within which the charismatic, the transformational, and the heroic leader continues to occupy an elevated position, leaving the more common daily presence of the toxic individual in the shadows. Few, if any, of us remain unaffected at one time or another. Even good and able leaders under certain conditions can come to exhibit bad and toxic behaviour as well. The gulf between the espoused values attributed to people as our most precious asset and how those assets are treated in practice are part of the reason for the lack of trust in management which surveys about organisational well-being have reported over many years (Whicker, 1996).
Im taking it for granted therefore that (i) leaders will not necessarily always be a force for good and (ii) the emotional turbulence and tensions generated within organisations can turn the heads of even the best of
31
Whilst anyone can have a bad day at the office, it is when executives come to display consistent patterns of the following types of behaviour that warning bells should start to ring.
Leaders are usually experienced and motivated individuals who just
want to do a good job. Everyday pressures and fears however can

become so amplified, when the drives for ambition and competition become too strong, and lead to sociopathic toxic behaviour in the workplace (Babiak & Hare, 2007).
The most obvious and overt indicators of leadership toxicity will be overly dramatic, histrionic, emotionally demanding, narcissistic, aggressive, suspicious, risk-averse, intimidatory and somewhat grandiose and egocentric leadership behaviours. Again it is the frequency and pattern of these types of behaviour which need to be watched for and where possible confronted. The (CCL) were early birds in researching how executives come to fail. Their work on executive derailment highlighted patterns (i) of abrasive and abusive behaviour, (ii) insensitivity to the needs of others, (iii) distant, aloof and arrogant ways of behaving, (iv) unnecessarily intrusive micro-management and (v) continuing self-serving behaviour as significant contributors to an executives derailment and demise (McCall & Lombardo, 1983).
What becomes apparent is that appointment to a position of formal leadership does not guarantee that positive, constructive leadership behaviour will be forthcoming. Irrespective of high office, impressive qualifications and titles, honours & decorations the leader as a person will remain susceptible to the full range of human strengths and vulnerabilities just like the rest of us. In organisations such vulnerabilities can become intensified and magnified and in this regard I see leaders as in need of protection just as much as those for whom they have responsibility. From personal experience organisational toxicity and leadership dysfunctionality are to be expected as a regular albeit unwanted facet of organisational life. It seems to me that such counter-productive dynamics could be better anticipated, and handled more openly and directly than currently is the case. If indeed people are our most important asset we need to do more to look after and protect them, warts and all, and this protection applies as much to those in positions of organisational leadership as to those who have yet to achieve such seniority.
For a good number of individuals the fear of a loss of power, position or reputation may be enough to trigger an executive into behaving dysfunctionally. Such things matter enormously to those who seek to maintain or enhance their position in the organisations power hierarchy. Although it will not be readily admitted, a motivation to protect ones position at work may well be the basis of decisions leaders make, and may account for some of the (otherwise) seemingly irrational decision-making and behaviour that can be observed in the workplace. For others, the pressure to succeed can result in leaders deciding that they just have to win, whatever it takes. Such ambition can lead them to feed on the vulnerabilities and insecurities of colleagues in much the same way as Rowlings (1999) Dementors drain the life out of their targeted victims and who, through their actions, destroy what that was good around them. No doubt the reflective reader may well be able to identify such instances from their own experiences.
WE SHOULD PERHAPS EXPECT RATHER THAN BE SURPRISED AT PROFOUND LEADERSHIP DYSFUNCTIONALITY, AND EVEN PREPARE & PLAN FOR IT.
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About the Author Babiak, P. and Hare, R. (2006) Snakes in Suits: When Psychopaths Go to Work. HarperCollins Publishers, New York. McCall, M. and Lombardo, M. (1983) Off the Track: Why and How Successful Executives Get Derailed. Centre for Creative Leadership, Greensboro, NC. Rowling, J. (1999) Harry Potter and the Prisoner of Azkaban. Bloomsbury, London. Walton, M. (2008) "In consideration of a toxic workplace: a suitable place for treatment", in (eds: A. Kinder, R. Hughes, C.L. Cooper). John Wiley & Sons, Ltd, Chichester. Whicker, M. (1996) Toxic Leaders. Quorum Books, Westpoint. Dr Michael Walton is a Chartered Occupational and Counselling Psychologist, an Associate Fellow of the British Psychological Society and a Fellow of the Chartered Institute of Personnel and Development. He runs 'People in Organisations Ltd' and is an Honorary University Fellow in the Centre for Leadership Studies in the University of Exeter Business School and a member of the Associate Faculty at Ashridge Business School.
Future organizational performance is inextricably linked to the capabilities and motivations of a companys people. Organizations that have used data to gain human-capital insights already have a hard-to-replicate competitive advantage. Others, too, can draw on these new techniques to improve their business results.
33
Ted Cantle
This isn't a volume where you might expect to find Professor Cantle, but this is very much where he belongs and what he is knowledgeable about is very much a matter of human capital. Diversity of course is one of those things that CEOs can conveniently hand off to HR. (Its a people issue I don't do people Im a CEO) but the sheer facts of the demographics of todays UK workforce are enough to make anyone take notice. The population of Bristol today (and therefore potentially its workforce) covers 300 original native languages. Thank God we have HR to cope with the implications.
The world around us is changing much faster than is often realised. We talk glibly about the impact of globalisation as though it is swirling around in the stratosphere, whereas the impact is here and now and very concretely in most of our own communities. It is already changing the way we live and work, and businesses will probably struggle to adjust quickly enough to the changing environment. The most significant and visible change is in terms of diversity. There are now over 300 languages represented in London schools and over 200 in most of our larger cities, nor does it stop there. Diversity is as much a feature in our market towns and rural areas. In Boston Lincolnshire for example, over 65 languages and 14 faiths are represented. It is inevitable therefore that increasing diversity will already have reached many of our workforces and, as with schools and local communities, this is posing new challenges. Far from being a steady process the pace of change is accelerating. Take the case of the City of Bristol. At the last Census in 2001 it almost exactly reflected the British population with around 8% of the Citys population being of minority background. The annual schools census for 2008 showed that 22.5% of pupils were from Black and Minority Ethnic backgrounds and 27.4% were of non-white British origin. This is almost a 50% increase from the 2004 figure of 18.5%. The distribution of children by age points strongly to a continuing rise in the overall numbers of non-white British pupils: 36.5% of above 50% in a good number of other areas. As a corollary, the process of change has been matched in Bristol, for example by a partial exodus among the white population to places like Cheltenham and Bath.
This greater level of diversity is recognised by many as of huge value to the British economy and as having enriched the cultural and social life of the nation. Not everyone agrees with this of course and far right political parties continue to trade on xenophobic and racist manifestoes. Their electoral support has grown from just 50,000 votes in 2001 to around 570,000 in 2009, and continues to grow. And we have seen an increase in religious extremism and tensions between many different communities who now share the same neighbourhoods. For the most part, however, our different communities have learnt to live together and our history of tolerance and fair play continues to stand us in good stead. Though we have had our problems our multicultural model compares favourably with all other advanced economies. As David Cameron recently pointed out in his speech on Multiculturalism1, some aspects of our daily lives are based on separate communities, with some schools, neighbourhoods and even workplaces operating on the basis of segregation. As our ethnic and religious minorities increase, one of the challenges will be how to avoid this becoming more of a problem.
1 The speech criticised multiculturalism in much the same way as the previous Government, in that the way policy had been interpreted in the past had been to promote separation as a means of preserving distinct cultures. My Report in 2001 on Community Cohesion (the Cantle Report) referred to the problem of parallel lives and was also widely seen as a critique of the then basis of multiculturalism. The speech was new in the sense that it specifically linked segregation to Muslim extremism, which many Muslim commentators thought unfairly identified the whole Muslim community with terrorism.
34
THOUGH WE HAVE HAD OUR PROBLEMS, OUR MULTICULTURAL MODEL COMPARES FAVOURABLY WITH ALL OTHER ADVANCED ECONOMIES.
We have yet to see much by way of practical policy responses and the minority communities complain that they are being presented as the problem for self-segregating, whilst contending that they have no effective choice because they are either too disadvantaged or discriminated against. The speech criticised multiculturalism in much the same way as the previous Government, in that the way policy had been interpreted in the past had been to promote separation as a means of preserving distinct cultures. My Report in 2001 on Community Cohesion (the Cantle Report) referred to the problem of parallel lives and was also widely seen as a critique of the then basis of multiculturalism. The speech was new in the sense that it specifically linked segregation to Muslim extremism, which many Muslim commentators thought unfairly identified the whole Muslim community with terrorism. The problem of segregation is only one aspect of the challenge which we now face as the growth in diversity continues to impact profoundly upon our labour market and workplaces.
In circumstances like these employers will also have to re-consider their working practices and ensure that their managers and first line supervisors are equipped with the necessary professional skills. We are already seeing businesses beginning to come to terms with challenges like whether to insist on English language across the shop floor and in all internal communications; whether to encourage or permit sections of the workforce to be organised by shift or production line according to ethnic or religious affiliation; and whether the forming of single identity representative groups (e.g. a black workers group) is good or bad for workforce cohesion.
EMPLOYERS WILL HAVE TO RE-CONSIDER THEIR WORKING PRACTICES AND ENSURE THAT THEIR MANAGERS AND FIRST LINE SUPERVISORS ARE EQUIPPED WITH THE NECESSARY PROFESSIONAL SKILLS.
The good news is that there are now many organisations already sensitive to diversity who have developed good practice, for example, iCoCos Workforce Cohesion Toolkit, while iCoCo itself has joined forces with People Resolutions and the Association of Labour Providers to form the
Workforce Cohesion Alliance.
About the Author Professor Ted Cantle CBE is Chair of the Institute of Community Cohesion (iCoCo) which advises on all aspects of community cohesion. He is regarded as the founding father of community cohesion having established the concept in the Cantle Report in 2001 which made a series of recommendations following the race riots in northern towns. There are many free resources on the iCoCo website at and Cantles book Community Cohesion: A New Framework for Race and Diversity is published by Palgrave Macmillan.
Increasingly, new recruits to the labour market will be more diverse than ever before and will have a much wider set of skills and aspirations as they equally bring with them a wider variety of social and cultural norms. Employers public and private sector will be pressed to develop a more sophisticated understanding of diversity and be able to adjust recruitment and selection accordingly. In some industries, the workforce will be made up almost entirely by people of minority background.
35
The Asset is the Value of all Those Who Make it Go

Though your balance-sheets a model of what balance-sheets should be, Typed and ruled with great precision in a type that all can see; Though the grouping of the assets is commendable and clear, And the details which are given more than usually appear; Though investments have been valued at the sale price of the day, And the auditors certificate shows everythings O.K.; One asset is omitted - and its worth I want to know, The asset is the value of all those who make it go.
slightly amended version of a poem by Sir Matthew Webster Jenkinson see also Archibald Bowman (1938) Timo Partanen (1998) and many others
Human Capital Data is Sexy!

Hal Varian likes to say that the sexy job in the next ten years will be the statisticians. After all, who would have guessed that computer engineers would be the cool job of the 90s? When every business has free and ubiquitous data, the ability to understand it and extract value from it becomes the [overwhelmingly] scarce factor. It leads to intelligence, and the intelligent business is the successful business, regardless of its size.
Data is the sword of the 21st century, those who wield it well, the Samurai.
Jonathan Rosenberg, SVP, Product Management, Google
Spotted at Human Capital Data is Sexy!
36
Dave Ulrich
Are We There Yet? Most people think we are with the new analytics. Or at least getting close. But lets ask Dave Ulrich. Here, extracted from an Whitepaper that he is using as the framework for his keynote speech at the forthcoming in October, and which hes kindly in the HubCap library, we find out how analytics can fundamentally rework business decisions, as well as how their rapid adoption is fundamentally redrawing the skill-set requirements of future HR.
As HR has become more aligned with business, evidence based HR and HR analytics have become increasingly important. 1 Without rigorously tracking HR investments and outcomes, HR decisions and priorities remain whims not science. With HR analytics, line managers and HR professionals can better justify, prioritize, and improve HR investments. While many HR decisions require insight and judgment, improved HR metrics helps HR move towards professional respectability and decisionmaking rigor. Let me suggest a few observations about the next generation of HR metrics. First, avoid a means/end inversion. The end of HR is to create value; improved HR analytics are a means to helping codify and make value happen. Some companies are so concerned about the HR scorecard or dashboard that they are making metrics the end, not the means. This is like a sports fan being consumed with the detailed statistics of the event and not paying attention to whether the team won or lost. Effective HR metrics means doing more predictive than descriptive analytics. Descriptive analytics have scorecards and dashboards that can be used for comparisons across time or with others. Predictive statistics emphasize a path with lead indicators and outcomes of interest. Instead of using mean data that shows how well we do, we will likely see more correlation based data showing how what we do impacts what we want to have happen. Showing how employee attitudes inside a company affect customer attitudes and investor confidence outside the company are examples of predictive HR metrics.
Second, avoid measuring what is easy and focus on measuring what is right. Just because something can be measured does not mean it should be. In the past, HR would measure activities (e.g., how many managers received 40 hours of training or how much people liked attending a training program). Going forward, we need to measure the outcomes of those activities. When focusing on outcomes, it is important to have a clear sense of what the desired outcomes of HR should be. Ultimately, HR investments should affect customers, investors, and other stakeholders outside the organization. Sometimes the line of sight between these ultimate outcomes and HR investments are difficult to track, and it is important to measure intermediate impacts of HR work. In this essay, I suggest that the intermediate measures of HR should be around the outcomes or targets of HR work: Individual ability: measure the talent within the organization. a. Competence: peoples ability to do their job today and tomorrow. b. Commitment: the extent to which people are engaged with and committed to the organization. c. Contribution: the extent to which people find meaning at work. Organization capability: measure the capabilities within the organization as the extent to which the organization has an identity that is shared both inside and outside the company. Leadership depth: measure the extent to which leadership exists throughout the organization.
37
I would suggest that it is important to show relationships between HR activities, HR outcomes, and business outcomes. When correlations and eventually causations can be determined, HR work will deliver more value. Third, keep measures simple and focused on decisions. Too often, the desire to quantify HR leads to more HR data than insight. Turning valid data into thoughtful decisions should be the focus on HR analytics. Sometimes this starts with data when HR information warehouses about employee attitudes, turnover, compensation, performance, and so forth can be used to improve decision-making. In these cases, HR professionals need to learn how to pull from the data key messages and trends. Turning complex data into simple messages requires that HR professionals can see themes or stories in the information warehouses they currently access to make more informed decisions. Sometimes, using data for decision making starts with clarity about the decisions that need to be made, then the data collected to improve those decisions. For example, as companies shift to doing business in emerging markets, decisions need to be made about how to staff, train, pay, and organize employees in those markets. Once these specific decisions are defined, HR can collect data to make better decisions. HR should become a decision science, not a data warehouse. Fourth, keep ownership and accountability of HR analytics with line managers. Line managers are the ultimate owners for HR work; they have final accountability for what is done and how well it is done. HR professionals are architects who build blueprints for actions and lay out choices that can be made. To gain line manager buy in and support for HR analytics, it is important to involve line managers in determining the goals of the HR metrics, in defining which HR metrics should be used, and in applying those metrics for improved decision making. Validity and reliability is less about statistics and more about managerial buy in and use of the data collected.
.
In our research on HR competencies, we found that HR professionals were consistently lacking in business acumen. Many HR professionals went into HR to avoid the quantitative side of business. But it is no longer possible to sidestep data, evidence, and analytics that bring rigor and discipline to HR. Statistics should become de rigueur for HR professionals.
1
There are great works on HR analytics and evidence based management:
John Boudreau and Peter Ramstad, Beyond HR: The New Science of Human Capital (Boston: Harvard Business Press, 2007). John Boudreau, Retooling HR: Using Proven Business Tools to Make Better Decisions About Talent (Boston: Harvard Business Press, 2010). Jac Fitz-enz, The New HR Analytics: Predicting the Economic Value of Your Companys Human Capital Investments (New York: Amacom, 2010). Jac Fitz-enz, The ROI of Human Capital: Measuring the Economic Value of Employee Performance (New York: Amacom, 2009). John Gibbons and Christopher Woock, Evidence-Based Human Resources: A Primer and Summary of Current Literature, Conference Board, Research Report (E-0015, 2007). John Gibbons and Christopher Woock, Evidence-Based Human Resources: A Primer and Summary of Current Literature, Conference Board, Research Report (R-1427-09-RR, 2007).
About the Author Dave Ulrich is a Professor at the Ross School of Business, University of Michigan and a partner at the RBL Group, a consulting firm focused on helping organisations and leaders deliver value. He studies how organisations build capabilities of leadership, speed, learning, accountability, and talent through leveraging human resources. He has helped generate award winning databases that assess alignment between strategies, organisational capabilities, HR practices, HR competencies, and customer and investor results. Dave has consulted and done research with over half of the Fortune 200. He has published over 175 articles and book chapters and 23 books. He edited Human Resource Management 1990-1999, served on the editorial board of 4 journals, on the Board of Directors for Herman Miller, and the Board of Trustees at Southern Virginia University, and is a Fellow in the National Academy of Human Resources.
STATISTICS SHOULD BECOME DE RIGUEUR FOR HR PROFESSIONALS
38
Amy Wilson
Everyone is talking about the emerging opportunity for HR to take advantage of the new analytics and regain their top table seat; few, like Amy Wilson, founder of Wilson Insight, an independent research and advisory firm, and VP & Principal Analyst at Constellation Research Group, are showing us how.
Despite strong efforts in the areas of HR efficiency and effectiveness, there is still a substantial wall between HR and the business decisions it wants to impact. There are two problems associated with this wall: 1. Business decisions are being made in a vacuum without the best data and insight
2.
HR is not seen as part of the solution.
HR leaders would do well to strive to solve both of these problems.
Image reproduced with permission from Wilson Insight, Inc, 2011
Workforce analytics can serve as a catalyst for equipping business leaders with better decision tools and for transforming HR into a value-add function if done correctly. Based on interviews with HR leaders making headway in this area including whats worked for them so far and whats planned the following represent a best practice approach for rolling out workforce analytics.
39
HR leaders have a myriad of stakeholders to consider, but, to create strategic impact and deliver business value, HR needs to make business leaders their number one priority.
Business leaders are the ones running the business and making strategic decisions. Narrow in on the metrics and analytics that will best , such as: determining and managing investments, identifying and retaining whos going to solve problems, balancing current and future priorities. To navigate the array of business leaders (from those that will fully embrace newfound insights and HRs role in delivering those insights to those that are sceptical of role changes and/or new technology), keep in mind: Business leaders with urgent, significant problems are more likely to be receptive. If you get a few champions some with those urgent problems and some that are just star leaders on board initially, it will be easier to gather momentum.
There is nothing more important than setting up your business partners for success. These folks are the face of HR. They are now going to be asked to do an entirely different job than in the past. There are three major changes required to support them:
1.
Developing skills. Two key skills stood

out as essential for strategic business partners: a consultative approach analytical story-telling
2.
Removing
administrative
duties.
Separate strategic and generalist roles or outsource lower level requests to a service center. Expect some growing pains here. Business leaders will need to learn how this works. Also, it will be easy for business partners to revert to what comes naturally.
3.
Tuning HR organization support.

The HR department may require some changes to support the business partners in their strategic interactions with business leaders.
40
If business decisions are made far away from HR, both sides lose out: The business misses out on insight HR can bring into the conversation to make better decisions, HR has little vision into whats important to the business leader (i.e. whats driving their decisions). It is for these reasons that its so important for HR to be in the room at the right time. Strategic conversation forums include 1:1s with business leaders and executive roundtables with leadership teams (talent reviews, business planning sessions). Successful characteristics of such forums: The conversation is business-centered. The HR partner brings something to the table (skills + tools).
There are four analytic tool characteristics to consider in luring business leaders into better decision-making and strategic conversations:
Guided
burning questions are laid out with an easy path to answers.
Actionable
theres a direct connection to the data, including a visual ability to drill into more detail, access source data, and initiate a change.
Relevant
information is centered on the business leaders purview (including benchmarks against the leaders situation) and data metrics are combined according to the leaders burning issues.
Business-centric
analytics are focused on business questions and can be accessed from business (not HR) dashboards.
It is powerful to have insight and tools to bring to strategic conversations, but theres a Its about being an advisor, not a gatekeeper. Rather than holding onto the information, HR should get it directly into the hands of the decision-makers and focus on staying a step ahead via depth and color analysis. to the business.
Interactive visualization tools can accelerate the value of strategic conversation platforms (in #3). and organizational planning tools can bring forward multiple, complex dimensions in an easy-to-consume way. Plus, the interactivity including drag & drop and real-time updates engages leaders in higher level of strategic dialogue and decision-making. In addition to the benefits of rich dialogue, HR saves days/weeks of administrative hassle pulling information together in preparation for the meeting by leveraging the data repository and online presentation.
Even if you just have basic data available, you have enough to get started. A quick win or two will meet your preliminary goals of getting business leaders visibility and creating conversation opportunities for HR business partners.
41
About the Author Building out the people data infrastructure often seems like an uphill battle (competencies, anyone?) However, creating visibility and conversation platforms into what is already available/tracked leads to insight into whats missing. The business partner comes away with not only insight, but also buy-in from the business leader to collect, restructure, invest whatever is necessary to get better results. It stops being an HR-driven proposal and becomes a business-driven proposal. work together to get to the overall goal of optimizing the businesss people assets by way of equipping business leaders with better decision-making tools and equipping HR to add value. With over 15 years of experience focused on the intersection of people, business, and technology, Amy balances vision and innovation with practical application. Amy is founder of , an independent research and advisory firm, and VP & Principal Analyst at . Prior to joining Constellation, Amy drove product strategy for Oracles next generation Strategic HCM Fusion applications. Amy shares her insight on her blog where she is in continual search of disruptive tools and practices that provide business value.
What steps have worked for you so far? planning to do next?
What are you
If one could tell the future by looking at Balance Sheets then Accountants and Mathematicians would have been the richest people in the world. ( )
The Fortune Teller by Gaspare Traversi Italian 1760 CE oil on canvas photo by mharrsch on Flickr
42
The Strategic Management of Knowledge

In an ongoing series of Harvard Business Review Blogs, , Ambani Professor of Innovation and , discuss how to strategically map the deep, implicit
Entrepreneurship at the Wharton School,

Business School, and Martin Ihrig, President of knowledge within your organisation. The first blog, with comments, can be found
, Visiting Professor at ESADE in Barcelona and Fellow at the Said
. We highly recommend that you take a look and have your say.
43
The
is the second issue in a continuing series, some of
them free and some by subscription, of specialist publications on all aspects of human capital measurement, management and reporting, and the role of the investment community of either reinforcing the status quo or encouraging change. It is sponsored by (HPA), a UK leader in human capital
analysis and research. The Handbook has been published on HubCap, a free network and publishing community for HC practitioners. The Human Capital Handbook 2011 is one of the services of HPA and its sister company People Resolutions, along with the library, publishing and collaboration options that currently provides. The Summer issue carries pieces on Investment Banking, Regulation, HR of the future, financial analysts tools for analysing Human Capital, Leadership, Corporate Culture, and more. HPA is a consulting firm of Corporate Investment Advisers, specialising in an area of human capital valuation, management and reporting that complements the work of the conventional investment advisory firms (Accountancy, Auditing, etc). Where the latter's expertise in valuing a business, for the purposes of acquisition, merger or corporate lending, emphasises the financial parameters of its worth, HPA concentrates uniquely on the businesss general and specific human capital strengths and weaknesses, what that says about long term sustainability, and in particular about the substantial potential risks attached to people's behaviour.
44
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Volume 1, Number 2 Published June 2011 ISBN Number: 978-0-9567311-2-8

Creative Commons Licence, Attribution-NonCommercial-NoDerivatives

Carol Royal & Loretta ODonnell Michael Walton

A really interesting read.

Carol Royal and Loretta ODonnell

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

This is an important distinction.

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

A TRUTH UNIVERSALLY ACKNOWLEDGED

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Diagram 1 INVESTMENT BANKS SELL-SIDE ANALYSTS

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Diagram 3 COMPANIES INVESTMENT BANKS

PENSIONS MANDATE + CONTRIBUTIONS

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

INVESTMENT BANKS SELL-SIDE ANALYSTS

Question: does it tell the time? And who wants to know?

RETURNS INFORMATION FEES ADVICE MANDATE + FEES INFORMATION BROKERING

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

In particular, according to Pecora, disclosure standards were nonexistent.

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Become Investor Literate

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Leaders are usually experienced and motivated individuals who just

want to do a good job. Everyday pressures and fears however can

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Workforce Cohesion Alliance.

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

The Asset is the Value of all Those Who Make it Go

Human Capital Data is Sexy!

Spotted at Human Capital Data is Sexy!

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

There are great works on HR analytics and evidence based management:

STATISTICS SHOULD BECOME DE RIGUEUR FOR HR PROFESSIONALS

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

HR is not seen as part of the solution.

HR leaders would do well to strive to solve both of these problems.

Image reproduced with permission from Wilson Insight, Inc, 2011

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

Developing skills. Two key skills stood

Tuning HR organization support.

THE HUMAN CAPITAL HANDBOOK 2011 - POWERED BY HUBCAP

burning questions are laid out with an easy path to answers.