||Issue No. 241||08 October 2004|
That’s All Folks!
Interview: The Last Bastian
Unions: High and Dry
Security: Liquid Borders
Industrial: No Bully For You
History: Radical Brisbane
International: No Vacancies
Economics: Life After Capitalism
Technology: Cyber Winners
Poetry: Do It Yourself Poetry
Review: Hard Labo(u)r
The Locker Room
Letters to the Editor
Invest In Dignity - Part II
In my previous letter I outlined my concerns about the impact 'bullying cultures' have on the economic performance of companies - 'over time', well I am pleased to share with you once again further investment insights - and research that validate what we have both commented on in previous issues. Investing in people and their dignity makes very real economic sense.
Warren Buffett ( also known as the Oracle from Omaha, as well as being the second richest person in the world, only slightly behind Bill Gates) is regarded by many people in the financial world as a freak of nature when it comes to investing, yet, as they learn more about his thinking, they start to understand that he is both very practical and disciplined.
For example, he believes that when you look at any potential investment you should look at it as if your were an owner of that business. This makes sense.
He also believes that the relationship between market value and business value strengthen with time (for better or for worse), and many of his investments were purchased at times when the market undervalued excellent businesses which he knew 'over time' would reflect the true underlying value and growth. This also makes perfect sense.
He also regards short-term trading or going with the latest 'hot stock' as speculative, and very dangerous, because the way he sees it - how can you put your money into something you don't understand. This is what most punters have a hard time understanding.
His approach to investing is simple yet uncommon, however, in my experience what he practices and preaches makes good sense. Here are a few of his rules:
1. Concentrate your investments in outstanding companies run by strong management.
2. Limit yourself to the number of companies you can truely understand.
3. Ten is a good number, more than 20 is asking for trouble.
4. Pick the best of your best companies, and put the bulk of your investment there.
5. Think long-term - 5-10 years, minimum.
6. Stock market volatility happens, Carry on.
This also brings me to my most important point, we now have some very strong evidence that 'investing in people and their dignity' is a very worthwhile investment, producing excellent returns over the long term. I will let the following article speak for itself:
People: cost or value?
Wednesday, 06 October, 2004
By Glenn Martin
Organisations continue to see their people as a cost to business rather than the basis of business success, because of the focus of traditional accounting methods. Until organisations learn to measure the contribution of people to their capability, they will continue to under-invest in initiatives that would enhance that capability.
Dr Lauri Bassi recently visited Sydney from the USA to present workshops for the Australian Human Resources Institute. She put the case for a new measurement system that complements the financial data provided by profit-and-loss statements and balance sheets. Her argument was that being competitive in a knowledge-based economy depends on the contributions made by people, not so much their physical resources or technology.
Bassi asserted that traditional accounting methods track historical data about investments in physical resources and technology. However, they do not provide any measures that inform organisations about the potential of their people to generate future success. In a knowledge economy, organisations need to know what factors lead to future income-earning capacity - they need good lead indicators, because investments in people take time to bear fruit.
Measuring investments in human capital
The question for organisations is, what are the factors that can predict future success? Bassi has carried out research into the connections between organisations' financial performance and their prior investments in human capital. Her work has spanned the last seven years and involved partnerships with the American Society for Training & Development and articles published in the Harvard Business Review.
The framework that Bassi and her colleagues have developed has produced a set of tools, the Human Capital Capability Scorecard. It draws on research from a number of researchers during the 1990s. This research examined the links between the management and development of people's potential on the one hand, and subsequent financial success on the other. Various researchers found that particular developmental initiatives were associated with above-average organisational performance.
But Bassi also wanted to establish that above-average investments in human capital (without distinguishing particular types of initiatives) results, in general, in superior organisational performance. She selected a group of publicly traded companies that invested at roughly twice the industry norm in employee development and then followed their performance on the stock market.
The results were clear, over a period of four years. The selected companies significantly outperformed the market. The Standard & Poor 500 annualised return for the period was 10.7%, while the selected portfolio delivered an annualised return of 16.3%. This exercise was followed up with a live portfolio of companies in conjunction with a money management firm, and the results between 2001 and 2003 were similarly impressive. The portfolio again outperformed the Standard & Poor 500 market index.
The conclusion Bassi reached was that a company's future financial performance is predictable based on its prior investment in human capital. Questioned as to whether it matters what particular initiatives and programs organisations invest in, she responded that it makes sense to assume that organisations themselves know best what is most needed. We can generally assume that they will spend their employee development funds wisely and look for a return on them.
Bassi observes that a policy of investing in human capital runs counter to the common management mindset of cost-cutting and looking at the short-term gains. She says her results show that there is a link forwards from human capital investments - those companies that made such investments were rewarded subsequently by the market. On the other hand, companies that cut back on such spending "because times are tough" did not show future gains in the market from this cost-cutting.
Developing a scorecard
The Human Capital Capability Scorecard developed out of a closer examination of the different aspects of human capital. The Scorecard consists of two major areas: human capital foundations and human capital outcomes. Each of these contains a number of measures, about which organisations can obtain data from across the organisation. Information and perceptions are obtained from workers and managers, and from different departments of the organisation. These measures are then correlated with measures of financial and business performance.
The outcome of the exercise is that the organisation can identify which human capital areas are likely to yield the greatest return on investment. For example, data might reveal that the area where the organisation performs most poorly is in leadership and managerial practices, or in knowledge accessibility.
Bassi has carried out the Human Capital Capability Scorecard exercise in organisations that differ markedly in size and type, ranging from a school to a consortium of 17 large US banks. She says that the exercise can be very confronting, as it can give a very unflattering account of the organisation's treatment of its human capital and systems. However, her experience is that because the exercise bases its scoring on a wealth of data from multiple sources, managers generally accept the need for change, and the scoring provides clear indicators of where the most profitable changes can occur.
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