Driving investment value with HR

Human capital is unquestionably a key driver of long-term investment value in most companies today, and Halliday affirms that the collective quality of a workforce’s knowledge, skills and experience can play a major role in improving the performance of a company.

Short-termism is a common issue with investors, and both companies and shareholders need to understand and communicate drivers of long-term investment value.

One thousand one hundred and twenty-seven factory workers were killed and approximately 2500 more were injured when the Rana Plaza building – an illegally built garment sweatshop – in Dhaka, Bangladesh, collapsed in April this year. While this was the worst industrial accident in the history of Bangladesh, it was not an isolated event, and prior to this tragedy around 700 workers have died in similar accidents across the country.

While outsourcing services and production to countries across Asia is a common practice for many companies as they seek to reduce costs, there is often a fine line between risk and reward in the pursuit of higher profit margins. A recent AMP Capital Corporate Governance Report noted, for example, that companies that have recorded some of the biggest falls in share-price are often those that have suffered corporate governance scandals, environmental disasters, recklessly cut corners and/or lost their relevance to consumers after failing to invest in the future.

The risks of short-termism
This has important implications for investors.  While share price is one measure of shareholder value, the report noted that a company’s ability to generate returns for shareholders over the long term will often depend on how it addresses the more intangible environmental, social and governance factors affecting both its unique business model as well as the industry sector.

Karin Halliday, manager, corporate governance at AMP Capital Investors, observed that myopic investors can risk pushing companies into making decisions that are detrimental to their long-term performance. Executives often complain that shareholders’ obsession with short-term performance forces them to make decisions that hurt long term returns.

“Short-termism is a very prominent issue,” said Halliday. “Since the global financial crisis, a lot of companies are being pressured to do more with less and there has been ongoing cost cutting of workforces. There are lots of examples where cutting costs can come back to bite you. So there’s a fine line in terms of cost reduction as opposed to value creation and how companies structure their workforce and manage their people to improve performance and productivity.”

Using the tragedy in Bangladesh as an example, Halliday pointed out that companies may need to beef up their risk management and other internal policies and practices when looking to reduce costs through outsourcing.

“If you chase the lowest cost, this often has risks associated with it,” she said. “Once you move manufacturing to a new country, especially if it’s a developing economy, the infrastructure often isn’t there, the occupational health and safety conditions aren’t there, and knowledge in terms of being able to quickly switch to new styles in terms of the fashion product isn’t there. So companies often need to be aware of this and factor them into their risk management.”

Drivers of long term investment value
Over the long-term, capital markets will ultimately benefit from companies which choose to act responsibly and that have sustainable business models. However, the report notes that shareholders need to appreciate this and give companies room to successfully balance the short- and long-term drivers of value. Without such appreciation, shareholders risk becoming part of the problem, rather than the solution. “If capital markets are to survive over the long term, shareholders cannot afford to focus solely on the short term; as can be seen from what has happened in Bangladesh, sacrificing tomorrow’s growth for today’s gains is not sustainable,” the report noted.

Halliday acknowledged that different companies have different competitive advantages and ways of realising value over the long term. In some companies it’s all about leading edge technology which requires investment in research and development, while in others, brand is critical and investment in protecting and promoting brand is crucial.

“We look at not only tangible assets but also at the intangibles,” she said. “We place a lot of emphasis on the sustainability of the business; this is not just how environmentally friendly a business is, but we look at how a business manages its workforce, how much they spend on R&D if that’s particularly relevant to a company, as well as other key objectives and drivers of value in the long term.”

The report noted that other examples of businesses that have displayed strategic long-term thinking include property owners and developers who have invested in the “green” credentials of their buildings. “Green” buildings are not only environmentally friendly but can also be “financially friendly” as they are more attractive to tenants, incur lower energy costs and interestingly often boast lower staff absenteeism, hence greater productivity.

Investment value and HR
Human capital is unquestionably a key driver of long-term investment value in most companies today, and Halliday affirms that the collective quality of a workforce’s knowledge, skills and experience can play a major role in improving the performance of a company.

“For a lot of companies, it’s about the human capital and the quality of the people they have,” she says. “Companies need to focus on attracting the right people, motivating them and rewarding employees for the right behaviours; and by right behaviours I mean something that will benefit all stakeholders, including shareholders.”

Safety is one obvious and important driver that companies acknowledge in annual reports for shareholders. “Internally, good safety gives you comfort that your employer is looking after you,” said Halliday, who added that learning and development, good remuneration as well as low turnover levels are also good indications of the quality and potential value of a company’s human capital.

“So it pays to invest in your people in ways that reward them. If you do this, they will reward the company and this rewards shareholders,” she said. “I meet with a lot of company chairmen and we talk about these factors and other key human capital issues in their business. So what are they doing to invest in their people, how do they approach succession planning, especially at the executive level, and what are they doing to make sure they have the right skills on board to make sure their business is able to respond to market issues and realise its goals?”

Improving lines of communication
Shareholders need to understand the importance of taking a long-term, sustainable approach to investing, and communicate this to the companies they are looking to invest in, according to Halliday. “Once shareholders appreciate this, they don’t just look at weekly or monthly performance charts; they start to look further out, and this also encourages companies to take a longer-term approach to business issues,” she said.

“Shareholder engagement is really important; a lot of companies haven’t engaged with shareholders enough in the past and a lot of shareholders haven’t been proactive in communicating with companies, so this leads to misinformation and misunderstandings. Ideally, you want to get companies and investors talking directly to each other and having a really clear dialogue about what it is that drives the value for the company.”

One of the major benefits of the two strikes rule is that major shareholders are able to communicate and engage with companies a lot more, Halliday said. “Companies are proactively coming to us now to talk about issues; they want to get our support for remuneration structures, so we’re having a lot more one-on-one meetings with companies,” she said.

“This gives us the ability to talk to them about other issues and factors that help drive long-term value. So both parties need to understand the benefits of taking a long-term approach and communicating this through an open and honest constructive dialogue.”

An opportunity for HR
There is a significant opportunity before HR to help create shareholder value as the HR function is at the forefront of many processes and practices that can help drive long-term investment value, according to Jeff Higgins, CEO of the Human Capital Management Institute, a leading global consultancy which specialises in workforce planning and analytics.

However, “When we talk about workforce productivity, the interesting thing is HR people don’t really feel like that’s their job,” he said. “I would argue this is a huge missed opportunity, because if HR really wants a seat at the table, they are in a pivotal position to affect workforce productivity. Those factors that can enhance or really hurt a company’s ability to attract, retain and develop the best people largely sit with HR.”