Many organisations do not have the leadership and managerial skills required for successfully managing their human capital. An effective human capital management program that is recognised and fully integrated as a core organisational competence results in superior financial performance.
The most successful organisations have superior strategies for managing and developing their people. They recognise effective leadership as one of the most critical contributors to corporate profitability and the most important driver of their ability to attract and retain top performers.
For a number of years now our strategic alliance partners McBassi & Company has been working to help improve the return on investment in human capital. As a result of this work we have identified and quantified four key categories of factors that characterise those organisations that have leaders who consistently deliver superior business results. These include the following:
Communication: Leaders who are open and honest in their communications, have an effective process in place for communicating news, strategies and goals to employees and do a good job of letting employees know what is expected of them.
Inclusiveness: Leaders who seek and use employee input, work in partnership with employees, and treat them with respect.
Skills: Leaders who demonstrate organisational values, eliminate unnecessary barriers to getting work done, provide constructive feedback, provide employees with performance appraisals, and inspire confidence.
Systems: Organisations with effective systems and processes in place for identifying and developing the next generation of leaders and ensuring smooth leadership transitions.
By systematically measuring and tracking specific items in each these categories and then using those measures to guide investments in leadership development, it is possible for an organisation to more rigorously improve the effectiveness of its leadership and its leadership development practices.
A global study based on an internationally researched framework provides an integrated approach that has three complimentary tiers: organisational results (both financial and non-financial); human capital outcomes and human capital foundations - enablers, resources, operations and systems.
Five categories of human capital management are presented in the second tier of the framework:
- Leadership practices
- Employee engagement
- Knowledge accessibility
- Workforce optimisation
- Learning capacity
These provide a core set of measures that senior management and human resource development practitioners can use to increase the effectiveness of their investment in people.
My article Measuring What Really Matters published the outcomes of this global study based on these five key human capital indicators. Since then the preliminary findings of a human capital benchmarking initiative conducted in the United Kingdom by the Financial Services Skills Council with support from the Sector Skills Development Agency have been released. The project utilised the Human Capital Framework presented as Figure 1.
An analysis of the relationship between human capital management (HCM) factors and financial outcomes found that the human capital factors most closely statistically linked to superior financial performance are:
- supervisory skills
- the extent to which business unit leaders value and support learning
- managers' inclusivity
- collaboration and teamwork
- processes for getting work done efficiently and effectively
The analysis demonstrated that even relatively modest improvements in these factors would be expected to generate substantial gains in financial performance.
These findings are consistent with a significant study of the relationship between an organisations investment in human capital and its overall business performance. A number of leading banks in the USA participated in a national study carried out by the American Bankers Association. The study concluded that institutions that demonstrate the greatest commitment to human capital enjoy the greatest financial returns.
A focus on HRD
While external data and information on best practices can be very helpful they are most effective when they complement organisation specific intelligence. There are many useful surveys and research reports available to assist senior executive management, human resource managers and learning and development practitioners identify organizational strengths and areas of vulnerability.
The main objective of this article is to stimulate thought and encourage action that will improve the effectiveness of human capital and assist human resource development practitioners focus their learning and development programmes on productive and rewarding action areas.
Laurie Bassi, Chief Executive of McBassi & Company warns that many organisations are in a constant search for the latest "silver bullet" and prefer to pursue quick fixes (such as isolated training programs based on the latest management fad) rather than undertaking the hard work of identifying and tackling the weaknesses within the organisation that are impeding its progress towards its key goals.
"The dearth of valid assessments that are capable of measuring an organisation's human capital management and linking it to business results means that investment in HCM are at a disadvantage in relation to other major investments competing for an organisation’s scarce resources", Laurie cautions.
Although there is widespread agreement that organisational leadership - including senior executives, managers, and frontline supervisors - is an essential ingredient for successful organisations, there is little valid, rigorous evaluation of its impact on business results. This hole in our collective knowledge makes it difficult for organisations to optimise return on investments in leadership development.
Leadership practices
Leadership practices include managers’ and leaders’ communication, inclusiveness, performance feedback, supervisory skills, demonstration of key organisational values and ability to instil confidence. Effective leadership practices provide the critical foundation for the achievement of all organisational goals.
The accompanying charts provide an indication of current practice. They are rated on a scale from one (the lowest) to five (the highest). Best practice organisations are those who scored in the top twenty percent. Managers are employees with supervisory responsibilities within a business unit and executives are employees with significant responsibilities who work at the corporate level.
Communications = managers or executives are open and honest in their communications, have an effective process for communicating news, strategies and goals to employees and do a good job at letting employees know what is expected of them.
The survey indicates that managers are marginally more effective at communicating than executives. The most significant difference was in the area of encouraging employees to freely communicate opinions and ideas. This is an area in which there is considerable scope for improved performance at the most senior levels and this has implications for those responsible for designing and conducting executive development programs.
Inclusiveness = managers and executives seek and use employee input, work in partnership with employees and treat employees with respect.
Here the managers rated well on treating employees with respect and working in partnership with their direct reports to achieve the organisation’s goals.
However there was a gap between executives and managers in seeking and using input, ideas and suggestions from employees in formulating plans and making decisions with managers clearly outperforming the senior group.
Supervisory skills and executive leadership = the extent to which managers and executives demonstrate organisational values, eliminate unnecessary barriers to getting work done, provide constructive feedback, provide employees with performance appraisals and inspire confidence.
Areas needing improved performance are the elimination of barriers to performance and improved feedback on individual employee performance and behaviours. There was a high level of confidence in the ability of departmental managers to guide the department to success.
Conclusion
Effective leadership is one of the most critical contributors to organisational success and the retention of high performing employees. The enhancement of current leadership skills and the development of future leaders is a major challenge for senior executive management and provides a unique opportunity for human resource development practitioners to add value to their respective organisations.
References:
L. Pickett, 2005 Optimising Human Capital: Measuring What Really Matters Training and Development in Australia, August.
American Bankers Association. 2004. Chief Learning Officer Summit: Final ReportL.J. Bassi and D.P.McMurrer. 2005 The Business Benefits of Skills. Research Paper.
L.J. Bassi and D. McMurrer. 2004. How’s Your Return on People? Harvard Business Review.
L.J. Bassi, P.Harrison, J.Ludwig and D. McMurrer. 2004. The Impact of US Firms’ Investment in Human Capital on Stock Prices. Research Paper.
This article is an edited extract from "Developing Asia-Pacific’s Future Leaders", a presentation given by Les Pickett in Kuala Lumpur, Malaysia in October 2005.